Opening the black box of economic processes: Ecological Economics from its biophysical foundation to a sustainable economic institution

Abstract

The roots of Ecological Economics can be found at the very beginning of Classical Economics, where physical wellbeing was the object of research, instead of the allocation of resources. Although Neoclassical Economics abandoned this objective early on, other efforts to study the biophysical foundations of the economic processes persisted and were inherited by modern Ecological economists. The fundamental difference between Ecological Economic theory and Neoclassical Economic theory is that, Ecological economists attempt to open the black box of economic processes with modern scientific tools, while Neoclassical economists expand the black box without interest in the mechanisms inside. However, in the current Ecological Economics framework, the social sphere of discussion is dominated by translated mainstream versions of Ecological Economics, rather than its original biophysical form. In the next stage of its evolution, Ecological Economics must address such inconsistencies to provide institutional insights based on the biophysical foundations of the subject, to fully open the black box of how human society extracts material and energy from the ecosystem, transforms them into physical wealth, and distributes that physical wealth. Also it must provide policy implications on how to carve out a sustainable economic institution.

Keywords

biophysical foundation black box Ecological Economics economic institution history of economics

Introduction

Marked by the founding of the International Society for Ecological Economics in 1988 and the initial publication of its journal Ecological Economics in 1989, Ecological Economics as a subject has evolved for three decades. Its realistic intention is to respond to the real-world predicaments of environmental and energy crises that have arisen repeatedly since the 1970s, yet its philosophical heritage traces its roots back to the very beginning of the history of Economics. In fact, Ecological Economics has ignited such deep reflection on the Economics paradigm that it might kindle a profound paradigm shift.

Sadly, the proponents of Economic theories have failed to pay enough attention to Ecological Economics, and even treat the subject as merely an applied branch of Environmental Economics.¹ However, that’s only a partial view of Ecological Economics based on its overlap with Neoclassical Economic theories. The basic concept of Ecological Economics is that the economy is a subsystem of the containing ecosystem. This means that human society has to obtain material and energy through the economy, so the economic process follows biophysical rules, such as the laws of thermodynamics, and it must incur biophysical costs. The scope of the economy is finite, limited by the biophysical resources on which it depends. This basic concept is fundamentally different from that of mainstream Neoclassical economists, who always think in abstract monetary terms and consider abstract economic rules as universally true without limitations. The biophysical perspective of Ecological economists originated from the works of Classical Economics. Though this materialistic view was abolished by the marginalists and other early proponents of the neoclassical vision, it persisted in some small measure, and was further developed by the predecessors of Ecological Economics. Unfortunately, this fundamental difference from Neoclassical Economics is always neglected by academia. A lot of misunderstandings have emerged from this neglect.

These days, human society faces the global challenges of climate change, global economic inequality, biodiversity collapse, and many others. The current growth-mania economy might be a major cause of these global catastrophes. Mainstream Neoclassical Economics, though it claims sustainable development as one of its major goals, is inadequate to tackle these problems because its current theoretical framework neglects the biophysical foundations of the economic processes. Neoclassical economists utilize monetary tools to analyze economic processes. However, the monetary sphere is only a part of the economy’s institutionalized existence. The monetary sphere is not only much smaller than the economy itself, but also it can be, and often is, distorted for unequal exchange. Ecological Economics includes the economy’s social and biophysical spheres, especially the material-energy flows which are immune to institutional distortions. This inclusion not only covers the indispensable theoretical foundation, but also informs a fuller and more realistic picture of the economic processes. Biophysical laws, such as the conservation laws and entropy laws, are used to analyze the economic processes. Thus, Ecological Economics provides a much more realistic theoretical framework than mainstream economic theories, and is much better prepared to help in meeting the challenges in the real world.

Most of the Ecological economists are aware of this fundamental difference. However, when discussing social, especially institutional problems, some may forget the biophysical sphere of the economic process. This inconsistency is a major obstacle for future development of the subject.

Through revisiting the origins of Ecological Economics, summarizing its major challenges to the mainstream economic theories collectively called Neoclassical Economics, and pointing out the inconsistency between the biophysical and social/institutional spheres of the discipline, we hope to inspire future researchers to promote the paradigm shift forward, and thus, provide the human society an authentically sustainable framework, which is the urgent need of our present epoch.

Ecological Economics’ heritage and its reflection on Neoclassical Economics

Ecological Economics emerged in response to urgencies in the academic and the real world in the latter half of the 20th century, while returning to the broad world view of Classical Economics. Ecological Economics has rediscovered the basic concepts of Classical Economics (concepts which had been distorted and misinterpreted by the modern economic theories), reviving the old ideas with new scientific tools, and is challenging the dysfunctional monologue of Neoclassical Economic theories.

The heritage from Classical Economics

Research methods and basic concepts changed dramatically during the shift from Classical Economics to Neoclassical Economics. From our standpoint, the most outstanding indicator of this change is the Neoclassical economists’ abandonment of the ideas (1) that the economy is constrained by objective and physical laws, and (2) that physical existence must in some way be transformed into physical wealth that is usable by the human race.

The founding father of Economics, Adam Smith (1723–1790), declared that economic research is about how human society produces and distributes physical welfare. Adam Smith elegantly explained why the science of wealth is defined as “Political Economy”: “Political economy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state of commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign” (Smith, 1991: 374). Another authoritative Classical Economist, Simonde de Sismondi (1773–1842), gave a more direct answer: “Political economy is the name given to an important division of the science of government. The object of government is, or ought to be, the happiness of men, united in society; it seeks the means of securing to them the highest degree of felicity compatible with their nature, and at the same time of allowing the greatest possible number of individuals to partake in that felicity. But man is a complex being; he experiences moral and physical wants; therefore, his happiness consists in his moral and physical condition . . . The physical well-being of man, so far as it can be produced by his government, is the object of Political Economy” (Sismondi, 1991: 1). Famous contemporary Economic historian Robert L Heilbroner (1919–2005) depicted the idea more explicitly, “economics is the study of a process we find in all human societies—the process of providing for the material well-being of society. In its simplest terms, economics is the study of how humankind secures its daily bread” (Heilbroner and Milberg, 2012: 1).

Such emphasis on the physical aspect of the economic system has produced notable advances in the history of economic theory. The first scholar to systematize the interaction between the economic system and the natural factors was the Physiocrat François Quesnay (1694–1774), who stated that only the agricultural sector can produce real wealth, whilst all the other sectors only distribute wealth. Hence, economic activity must obey the rules of nature. Quesnay (1894) had devised the famous “Economic Table” (Tableau Économique) to elaborate the flowing pattern of agricultural wealth through the economic system. His ideas provided critical insight for Wassily Leontief (1905–1999), who revised Quesnay’s table on the agricultural economy to become the input–output table for the industrial economy (Leontief, 1941). Thomas Malthus (1766–1834) wrote An Essay on the Principle of Population. Malthus set up the first model explaining the interaction pattern between the socio-economic system and the ecosystem through plain language, where he famously pointed out the contradiction between a geometrically soaring human population and the natural progression of the growth of agricultural production (Malthus, 1817). This was an inspiration to the 20th century authors of “Limits to Growth” (Meadows et al., 1972). Unlike the Physiocrats, Classical economists like Adam Smith and David Ricardo did not consider agricultural products to be the only form of wealth. Nevertheless, the land factor still played an essential role in their models. In particular, Classical economists still regarded wealth production and allocation (i.e. how material wealth is generated and flows through the economy) as their primary research objects, and the land factor carries broader meanings than the abstract quantitative variable it is today in modern economic models. To them it represented a complicated world of natural ecological rules, reflecting the sources of wealth offered and the restraints that the ecosystem placed on material wealth production. Regrettably, due to the limited progress of natural sciences in late 18th and early 19th centuries, Classical economists lacked appropriate analytical tools to systematically depict and analyze the complicated interactions that exist between the economy, society, and nature.

In 1932, the Neoclassical economist Lionel Robbins (1898–1984) wrote An Essay on the Nature and Significance of Economic Science in which he totally repudiated Smith’s classic definition of Economics, describing the classical definition as “materialism,” and gave the now widely-accepted definition that Economics is the science of studying the optimal allocation of resources (Robbins, 2007). Mainstream 20th century economic theorists followed Robbins’ path instead of Smith’s path.

The problem of resource allocation is ubiquitous, going far beyond the borders of the economic processes it covers every aspect of not just human society but of the ecosystem on which the economy is wholly dependent. Robbins’ definition has led us to Economics Imperialism—the idea that all the ecological or social problems can be resolved through economic analysis of costs and prices. It has also led to the longer-term global effects now denounced by Ecological economists. It appears that the Neoclassical Economic theories of today mainly focus on the monetary aspect. For the biophysical aspect of the economy, it left the parts that are not purely mathematically abstract, such as the empirical laws of thermodynamics, out of consideration, and replaced those insights with pure abstract cost-and-benefit mathematical games. The consequence is Environmental Economics, which concludes that the biophysical factors won’t limit economic growth. Such a sharp shift in world view was no coincidence. Eighteenth century productivity could hardly break from nature’s shackles, whilst in the early 20th century the capitalist industrial economies, fueled by seemingly limitless flows of cost-free oil, reached an ever-new peak, time after time, but had not yet touched the ecosystem’s biophysical boundaries. The constraining bond between the ecosystem and the economy seemed to be too frail to prevent the system’s massive expansion, thus its physical constraints seemed negligible to the point of irrelevance. And therefore, the physical basis was no longer essential for Economics, for the economic system could apparently expand indefinitely.

Fortunately, the basic concepts of Classical Economics did not die out. In fact, as scientific tools evolved, generations of scholars have been trying to systematize and model such concepts, and their efforts formed a distinctive philosophical bloodline inherited by its followers.

The inheritance dates back to socialist Sergei Podolinsky (1850–1891), the first scholar to study economic activity from the thermodynamic perspective, trying to integrate Marx’s Surplus Value Theory with Energy Theory, even discussing its possibility with Marx himself. As Podolinsky (1883) has pointed out, the biophysical bond with nature, rather than the production relation, is the key constraint to productivity development. Scientific socialism should be achieved with a solid energy basis.

After Podolinsky, chemist Fredrick Soddy (1877–1956) also discussed the biophysical basis of the economic system. According to Soddy, all energy expended by human society comes from the Sun, and the unprecedented density of recent economic activity is in essence the result of humanity’s exploitation of solar energy stored within fossil fuels. He also pointed out that economic theory confused the physical concept of wealth with the accounting concept of debt. The kernel of the economic crisis, therefore, is that virtual debt surpasses real wealth (Soddy, 1933). His contemporary, Alfred Lotka (1880–1949), meanwhile, combined Darwin’s theory of evolution with thermodynamic laws to reconstruct Economics on a biophysical basis (Lotka, 1914, 1922, 1926). Lotka’s ideas directly inspired economist Nicolas Georgescu-Roegen (1906–1994) and ecologist Howard T Odum (1924–2002) (Bobulescu, 2015; Røpke, 2004). The former’s protégé, Herman Daly, and Odum’s disciple, Robert Costanza, together with other scholars, most of whom are from Economics and Ecology, co-founded Ecological Economics.²

This line of heritage ensured that, in the 1960s and 1970s, when academia finally rediscovered the objective constraints that the depleted biophysical world places upon the economy, we could quickly apply appropriate scientific tools to analyze the economy from a new perspective.

In 1987, at the dawn of the foundation of Ecological Economics, the history of this inheritance was synthesized by Cutler J Cleveland (1956), and categorized as “Biophysical Economics” (Cleveland, 1987), with its origins dated back to the 18th century Physiocrats. However, other scholars sometimes forget this inheritance and date the origins of Ecological Economics back to the 1980s. We totally agree with Cleveland, but we also think that, “Biophysical Economics” is consistent with basic ideas of the founding fathers of Economics. In other words, the history of Biophysical Economics predates Neoclassical Economics and developed in parallel with the history of modern mainstream economic thought. We believe that the philosophical basis of the “biophysical economics” synthesized by Cleveland is also, at least as part of it, the philosophical basis of Ecological Economics, and “Biophysical Economics” remains today as a branch of Ecological Economic theory.

Challenges from Ecological Economics to Neoclassical Economics

Neoclassical Economic theory has expanded into a complicated system of multiple branches. At the same time, Ecological Economics has also expanded to become broad and variably elaborated. It is hard to summarize either theory’s differing characteristics in a few paragraphs. As for what exactly distinguishes Ecological Economics from Neoclassical Economic theories, and how exactly the former challenges the latter, different Ecological economists might give different answers.

Perhaps the best answers should be sought in the original works of the subject’s founders. After combing through the literature, we think it’s safe to conclude that the key challenge Ecological Economics has posed to Neoclassical Economics is that the economy is a subsystem embedded in the ecosystem (Costanza et al., 1993, 2017; Martinez-Alier and Muradian, 2015). There are two aspects of this challenge—an external size constraint, and an internal operational connection. First, the economy must face the size constraints imposed by the ecosystem and cannot expand limitlessly. Second, there are firm material-energy-money connections, both constraining and supporting, that exist between the internal operational dynamics of the ecosystem and the economy, and these largely determine how the economy operates. Let us examine these two aspects more closely.

First aspect of the challenge: scale of the economic system

First aspect to the challenge: the economy must face the scale constraints imposed by the ecosystem and cannot expand limitlessly. In consideration of the biological and physical resources, and the rates of consumption of both renewable and non-renewable resources, an ecosystem can only support certain levels of activity for limited periods of time. This seems to be an obvious issue to explore and elaborate upon.

Neoclassical Economic theory does not take such limits into consideration, merely internalizing natural factors into their models as variables that can be quantified. Those aspects of the ecosystem that do not fit into this one-dimensional model are considered external to their sphere of interest. Hence, in their world view, the ecosystem effectively becomes a subsystem of the economy. Kenneth Boulding (1910–1993) is perhaps the first modern economist who pointed out the boundaries of economic activity due to the entropy law. In 1966, he pointed out that, human beings’ economic activity has touched the ceiling of the ecosystem’s capacity; and thus, the earth is a closed space rather than an open turf for human activities (Boulding, 2017: 27). His vivid metaphor of “the economics of spaceship earth” inspired successive Ecological economists who demystified the scale problem with scientific tools. After Podolinsky and Soddy, Nicholas Georgescu-Roegen (1906–1994) systematically analyzed economic processes while considering the implications of the modern fully-elaborated theory of thermodynamics. In his early career, Georgescu-Roegen made great contributions to Neoclassical Economic theory. But later, he reflected on the whole framework of mainstream economic theory deeply and thoroughly from the perspective of thermodynamics in his masterpiece The Entropy Law and the Economic Process (Nicholas, 1971). He pointed out two unrealistic depictions of the physical foundation of the economy in the mainstream paradigm: reversibility and homogeneity. In his opinion, the economic process takes as inputs low-entropy energies and produces as outputs high-entropy waste energies, while low-entropy energy and structures in the environment are actually a scarce resource. In the world of entropy, the costs of all the economic processes outweigh the benefits, and thus, cause “deficit.” He also pointed out that due to the irreversibility of material and energy consumption, fossil energies would eventually run out, and thus the global economy is doomed to collapse one day to pre-industrial levels. Though named as the distinguished fellow of American Economic Association of 1971, Georgescu-Roegen’s contributions were intentionally ignored by mainstream economists.

Through his student Herman Daly, Georgescu-Roegen won the recognition of Ecological economists, who took his thoughts as one of the discipline’s corner stones. Daly inherited and developed Georgescu-Roegen’s theory and launched a more profound and comprehensive challenge to the mainstream paradigm. Daly insisted that economic development should respect fundamental natural-physical rules, respect the balance between market efficiency and ecological ethics, and basic concern for human welfare. According to Daly (1996), there are three major biophysical limits to economic growth: the finitude of the ecosystem, the inevitability of growing entropy, and the complicated interdependence on the ecosystem (p. 40). Besides biophysical limits, there were also ethical social constraints such as intergenerational equity. Thus, Daly suggested that instead of economic growth, economists should actually aim at better quality of life, and proposed the theory of the steady-state economy. He made a strong appeal for a sustainable steady-state economy in a world dominated by growth-mania (Daly, 1973).

Second aspect of the challenge: the biophysical foundation largely determines the mechanisms of the economy

The second aspect of the challenge: there are firm material-energy-money connections that exist between the internal operational dynamics of the ecosystem and the economy, and these largely determine how the economy operates. In other words, material-energy-money flow is not only the operational base of the economic system, but it is also the key to open the black box of economic dynamics.

Such ideas had been discussed in Soddy’s (1933) and Georgescu-Roegen’s (Nicholas, 1971) works. It would be proper to analyze debts, an accounting concept, with mathematical tools, but physics was actually the best approach when it comes to the study of wealth, a physical concept. Odum (1971) further developed such ideas. From his perspective, economic value originates from energy, whose ultimate source is the Sun, and the economic system is a sub-system that the human society utilizes to extract energy from the ecosystem. He made two specific economic assertions: first, the efficiency of an economy is its ability to extract energy from the ecosystem; second, beneath the monetary flow, there is a frequently ignored energy flow in the opposite direction (Cleveland, 1987).³ In the 1970s and 1980s, scholars interpreted such ideas into techniques for empirical analyses. For example, Hannon and colleagues developed an input-output model to calculate the energy cost of the services and products in the US economy (Hannon, 1975, 1977). Odum’s disciple, Costanza (1980, 1981), found that in the US economy, monetary value has a statistical correlation with its energy flows, and termed the idea as “embodied energy theory of economic value.”

Ecological Economics invited both natural scientists with sharpened analytical tools and social scientists with their broadened world-view to expand those models, and developed two new frontiers of research with rich potential.

First, according to Ecological economists, the collision between book debt value and real wealth is the ultimate eruption of the inner contradiction of capitalism, and the real culprit behind economic cycles (Kallis et al., 2009). Some scholars have gone further to voice their vision on reestablishing Macroeconomics (Brown and Ulgiati, 2011), and correct the distortions of the current financial system and national accounting system with the help of Ecological Economics (Costanza et al., 2017: 412–422). From our viewpoint, macroeconomics has not addressed this fundamental question: Why does capitalism keep unintentionally creating asset bubbles and bad debts, resulting in financial crises and economic cycles? Ecological economists’ response could be a key to such a puzzle.

Second, to dissect the global economy through the material-energy-money flow can help us comprehend more profoundly the nature of income inequality, and research in this field has blossomed after Marxist economists joined the Ecological Economics’ camp. According to Neo-Marxism’s world system theory (Wallerstein, 1974), the kernel of an economy is unequal exchange, whilst Ecological economists think that the most fundamental unequal exchange is ecologically unequal exchange, and have proven its existence, at least in part, by abundant empirical studies (Moran et al., 2013; Yu et al., 2014).

These two aspects of challenge are not independent, but connected by the same intrinsic logic. An economy is a subsystem, absorbing and emitting material and energy within the ecosystem, rather than an isolated castle. This is the reason why its limits have long been defined by nature. And, vice versa, such limitations mark the necessity to study the optimal scale of the economy and how it assimilates material and energy. This lays the basis of determining where the boundaries lie. Ecological Economics research may seem a clutter of unrelated branches, yet in fact they mostly spring from the two core ideas mentioned above.

Ecological Economics’ interaction with Neoclassical Economics

Though Ecological Economics has followed a different path of evolution in the history of Economics, Ecological economists and Neoclassical economists have been conversing since the foundation of the discipline. Ecological economists have been trying to translate their ideas into the language of mainstream economists, and in response, mainstream economists have been accepting and incorporating the idea of sustainable development into their own framework.

Robert Costanza and the Beijer Institute’s efforts in that regard have mandated that economists must respond.

Robert Costanza’s studies promoted the communication between ecologists and economists and quantitatively depicted how the economic system is supported by the biophysical ecosystem. He pointed out that the cost of ecosystem services hadn’t been captured by the market (Costanza, 2016; Costanza et al., 1997). His efforts to evaluate ecosystem services in a monetary form has not only been continuously opening new frontiers for Ecological Economics research, but has also mandated that economists must rethink their framework (Heal, 2000).

The Beijer Institute which was established in 1977 and reorganized in 1991 with a focus on Ecological Economics has been an organ through which Ecological economists have communicated with mainstream economists (Jansson, 1984). Beijer fellows interpreted the ideas of Ecological Economics into the language of economists to make their framework quantifiable and comprehensible. For example, sustainability was interpreted as intergenerational fairness in order to make the idea more familiar for political economists (Howarth, 1997), and easier to be integrated into the general equilibrium model and environmental valuation (Howarth and Norgaard, 1992); the role of biodiversity in the economy was translated into “insurance value” (Deutsch et al., 2003); the complicated “entropy law and economic process” theory was translated into the production process of intended goods and unintended goods (Baumgärtner et al., 2001); and the interdependencies of various resources were quantified into a complementarity index to evaluate the resilience of an economic system (Derissen et al., 2011). All these interpretations are convenient metaphors for economists to comprehend.

Those new ideas inspired the mainstream economists, who, as a result, produced a varied collection of works combining the idea of sustainable development and the language of Neoclassical Economics (Røpke, 2005). Nowadays, even the most conservative economists have to consider the idea of sustainability when constructing environmental models. However, it seems that mainstream theorists still refuse to admit that the economic process, in its essence, is a biophysical process, and that any explanation of economic activity requires a firm biophysical foundation.

A summary of the scopes and methods of Ecological Economics, Classical Economics, and Neoclassical Economics

To summarize, Ecological Economics has inherited the fundamental philosophical ideas of Classical Economics. Classical Economics and Ecological Economics both suggest that, what the economy absorbs and digests are not abstract numbers, but material and energy. Economic processes are also both ecosystem processes and human social processes. Neoclassical Economics, however, abolished the materialistic aspect of Classical Economics and translated the economic processes into monetized terms, and implements theories based on such an abstract monetized framework to analyze the whole real world. When discussing the economic process, Neoclassical economists focus only on the monetized portion, which can be easily quantified, but ignore the material and energy flows beneath the monetary flow (Table 1).

Table1.

World-view, scope and methods of Classical, Neoclassical, and Ecological Economics.

	The position of the economy	The scope of the subject	Methods
Classical Economics	The portion of human society that provides physical welfare.	◊ How the economy provides “daily bread”; ◊ How does this process interact with the ecosystem (Physiocrats) and the rest of human society (Political Economy).	Historical and philosophical analysis.
Neoclassical Economics	The whole of the real world is dominated by the economy.	◊ Nominally the whole real world; ◊ In reality only the monetized portion, because it observes everything through the monetary filter.	Quantitative and mathematical analysis of monetized values.
Ecological Economics	A subsystem of the ecosystem.	◊ The economic process as a biophysical process, extracting material and energy from the ecosystem to fuel the development of human society; ◊ How this process affects the sustainability of the ecosystem and human society.	Biophysical laws; Multidisciplinary studies.

EXPANDING versus OPENING the black box, two paths in the history of Economics

Then what exact role does Ecological Economics play in the history of Economics? And what is the essence of the paradigm shift proposed by Ecological economists?

Among all disciplines, Economics is a relatively young subject. Inevitably, Economics has been interacting with more mature disciplines. From our viewpoint, such interaction basically took place in two fundamentally different ways: construction of a theoretical framework in analogy to other subjects’ theoretical frameworks, or discovery and disclosure of the economic black box with the help of the tools and insights of other disciplines.

Expanding the black box through analogy—formation of Neoclassical Economic theories

Neoclassical Economics’ Alfred Marshall (1842–1924), pointed out that: “The Mecca of the economist lies in economic biology rather than economic dynamics” (Marshall, 1898: 43). In his opinion, due to the immaturity of its own paradigm, Economics should adhere to another subject’s analogy, or, in his vivid analogy, “may help one into the saddle” (Marshall, 1898: 39). At the beginning, with only the concept of static equilibrium on its plate, classical physics seemed to be the perfect teacher. In physics, all objects behave similarly, following the laws of Newtonian mechanics. In a similar fashion, marginalists like Marshall presumed that all humans share the same behavioral patterns. This is the Neoclassical Economic paradigm which we are so familiar with today. Marshall’s contemporary, Thorstein Veblen (1857–1929), a much more incisive critic, wrote two extensive articles to discuss the neoclassical paradigm of Economics: Why is Economics not an Evolutionary Science (1898) and The Preconceptions of Economics Science (1899). He pointed out that Economics is still not an evolutionary science, because an economists’ world view is based on static equilibrium, rather than dynamic evolution. Neoclassical economists were too busy classifying the factors in the economy, paying little attention to how they evolved. He pointed out that: “the classical normality still lives its attenuated life in modern economics.” The evidence is, “The ways and means and the mechanical structure of industry are formulated in a conventionalized nomenclature, and the observed motions of this mechanical apparatus are then reduced to a normalized scheme of relations. . . . With this normalized scheme as a guide, the permutations of a given segment of the apparatus are worked out according to the values assigned the several items and features comprised in the calculation; and a ceremonially consistent formula is constructed to cover that much of the industrial field. . . . Features of the process that do not lend themselves to interpretation in the terms of the formula are abnormal cases and are due to disturbing causes. In all this the agencies or forces causally at work in the economic life process are neatly avoided” (Veblen, 1898: 383–384). From his description, we cannot help thinking that he is criticizing modern Economics.

Since the last brick of the marginal revolution was laid, an economic framework in analogy to Newtonian dynamics has become the prevailing mainstream paradigm, and successive theoretical advancements in Economics have been, in reality, a process of adding new variables into the old model, yet lacking deep discussion on the dynamic relationship and interaction between these factors.

The true nature of Economic Imperialism is in fact one of constantly expanding the black box, swallowing concepts and converting them to more and more new variables, yet failing to untangle the messy internal interactions.

Opening the black box—paradigm shifts of Economics

So, how should Economics proceed to achieve the ideal framework? Marshall and Veblen gave their answers.

Marshall stated that at a more advanced stage, Newtonian mechanics would become an improper model to emulate. To quote his words, “in the later stages of economics better analogies are to be got from biology than from physics,” (Marshall, 1898: 39), because “‘progress’ or ‘evolution,’ industrial and social, is not mere increase and decrease. It is organic growth, chastened and confined and occasionally reversed by decay of innumerable factors, each of which influences and is influenced by those around it; and every such mutual influence varies with the stages which the respective factors have already reached in their growth. . . . In the later stages, the balance or equilibrium is conceived not as between crude mechanical forces, but as between the organic forces of life and decay” (Marshall, 1898: 42–43). The ideal paradigm in Veblen’s eyes is, in his own words, “an evolutionary economics must be the theory of a process of cultural growth as determined by the economic interest, a theory of a cumulative sequence of economic institutions stated in terms of the process itself.” And its aim should be: “It is necessarily the aim of such an economics to trace the cumulative working out of the economic interest in the cultural sequence. It must be a theory of the economic life process of the race or the community” (Veblen, 1898: 393–394).

As we can see, both of them had realized quantitative analysis itself could not tackle the conundrum, and the mechanism of interaction of various factors in the economy should be the subject of Economics in the advanced stage. Marshall might have vaguely sensed the limitation biophysical laws imposed on our economy (Daly, 1968), whereas Veblen stated unequivocally that economic activity is dominated by broader social factors, especially institutional ones. In other words, both of them advocated discovering the mechanisms veiled by the Newtonian mechanics analogy. Efforts advocated by the two masters took place in the history of Economics.

Current advocates of paradigm shift are all aiming at opening the black box, though from different perspectives. For instance, Evolutionary Economics analyzes the formation and evolving pattern of markets and economies under the framework of humanity, sociology, and psychology. Post-Keynesian Economics, on the other hand, illustrates the core difference between, on the one hand, credit and material currency and, on the other hand, commercial banks’ credit creation mechanisms through loans, from the historical angle. As for Ecological Economics, the subject brings thermodynamics, systems ecology, and complexity science into its toolbox to explore an economy’s biophysical laws, as well as its interaction with the ecosystem.

This evolving pattern of emerging new theories has blossomed several times throughout the history of economic theory, and has to a certain extent had an impact on mainstream economic theories. However, their original thoughts were emasculated to fit the mainstream framework. For example, Keynes revolution is in its true form the Effective Demand Theory deduced from psychology, a complete overthrow to the marginalists’ theories. Yet mainstream economists, though adopting its policy advice, thrust its revolutionary deduction aside. Skidelsky (2010), who devoted his lifetime to studying Keynes, stated that Post-Keynesian Economics is the genre closest to Keynes’ original ideas, while the mainstream economic theories have unmitigatedly distorted Keynes’ theory (p. 42). Old Institutional Economics stressed the embeddedness of the economy in the social and political structure (Commons, 1934), but New Institutional Economics, aligning itself with mainstream economic theory, simply bracketed them together as transaction costs, so that institutional change could be answered within the transaction cost plus homo economicus framework (Buchanan, 1989). In short, the way economists reacted to each such impact was to label a new variable and pack it inside the black box.

What remains to be done—a sustainable economic institution based on the biophysical insights

Why haven’t all the efforts—trying to disclose the inner workings of the black box of economic activity—shaken the grip of the mainstream economic paradigm, which has reigned since the marginalist revolution?

In our opinion, the key factor is, all the above efforts only partially revealed the operational patterns, yet failed to offer a comprehensive theory. Each advocate of paradigm shift has its own validity and insights, yet none of them can beat mainstream economic theory in completeness and comprehensiveness.

The real place that the economic system takes in real world

So, what should the ideal framework of a new economic paradigm look like? To answer that question, we must first understand the subject that Economics is studying (i.e. the economic system) and what role it plays in the real world.

Unlike Economic Imperialism, we argue that the economic system is a subsystem of both society and the ecosystem. In fact, it only occupies a fraction of the intersection between society and the ecosystem.

First, the economy is a subsystem of society. Polanyi and MacIver (1944) had first proposed the idea that the economy is embedded in society. Granovetter’s (1985) famous embeddedness theory also starts with the general hypothesis that economic behavior is embedded in the social structure. Luhmann (1995) also stated the idea in his works. In this thesis, we want to elaborate the idea more thoroughly. The discipline of Economics should be dedicated to demystifying physical wealth production and distribution. This is far from being the whole scope of human well-being. In analogy, if the society is a human body, then the economy is its digestion system, digesting and absorbing material to supply the body with energy. Without a digestion system man can never live, but we cannot thus conclude that the digestion system is the sole purpose of the body, or its functioning dominates all human activity, because the digestion system itself is also affected by the other systems of the human body. Likewise, besides Economics, society consists of various sections, like laws, institutions, and cultures, all blending and interacting with Economics. As Immanuel Wallerstein, representative of the world system theory of Neo-Marxism has stated, the world system is in three dimensions: economic, political, and cultural, the economic dimension being fundamental. Politics and civilization, on the other hand, reinforces the economic system (Wallerstein, 1974).

Second, as Daly and Costanza stated, the economy is a subsystem of the ecosystem.

If the economy is the subsystem of the ecosystem as well as that of the society, then how should we place it in the real world? To address this problem, we should first determine the relationship between the society and the ecosystem.

From our viewpoint, the intersection between society and the ecosystem exists. A substantial part of society is rooted in the ecosystem, in a solid biophysical basis. Without the ecosystem, there would be no production, and thus no life or reproduction, the fundamental base of society. Meanwhile, as Soddy stated, “No phosphorus, no thoughts” (Daly and Farley, 2011: 39). Men’s thoughts and ideology are closely linked with material and energy conversion. As the Chinese proverb says, “One valley, one culture.” Human cultures are also directly connected with the natural environment in which we live. Moreover, human arts and other spiritual works are also tightly tied to the hidden beauty of nature.

Nevertheless, society is not a subsystem of the ecosystem. Part of it is unique. It is true that society must absorb material and energy from the ecosystem, but it would be absurd to think that same material and energy breeds the same polity and ideology. In the time of economic globalization, how each country assimilates material and energy are all much of a muchness, yet each culture and regulation is more than unique. It is true that “No phosphorus, no thoughts,” but it is also true that “Phosphorus does not guarantee thoughts,” or “Same phosphorus does not guarantee the same thoughts.” Ecological Reductionism does offer an intriguing insight, but a confusion between energy flow and every move in society regardless of its uniqueness seems like a dangerous step toward the other extreme opposite to Economic Imperialism—Ecological Imperialism?

Therefore, we conclude that there is an intersection between society and the ecosystem, and the economy is part of that intersection. Thus, besides the economy, what are the non-economic parts of the intersection? There are, for example, different politics and culture, biodiversity, non-market ecosystem services like oxygen, sunlight, and all kinds of chemical reactions, all of which are non-economic. Some scholars have been trying to determine the influence of political and cultural differences on economies (Acemoglu et al., 2008; Cowen, 2008; Lal, 2001). Research on monetary valuation of ecosystem services has been devoted to the capitalization of all kinds of ecosystem services. But until now, political and cultural power, along with non-scarce ecosystem services, are still lingering outside the economic value system, rather than being successfully integrated into economic models.

The worldview we propose here is not totally consistent with the one most Ecological economists insist upon, which considers the society as a sub-system of the ecosystem. However, the grand picture here is consistent with Ecological economists’ idea of economy-in-society-in-nature (Costanza et al., 2017). As Costanza and his colleagues stated, the ultimate goal of the economy-in-society-in-nature is to maintain a “safe and just space for humanity,” which is both socially desirable and environmentally sustainable. The implication of such a world-view is that, as a discipline studying the economy, which is the subsystem of society which shoulders the duty of providing physical well-being through a just institution, and which also is the subsystem of the ecosystem which carries biophysical costs, Economics should relate these two spheres of activity and understand the interaction pattern. The monetized portion of the economy, which is the hot spot of mainstream Economics, is only one pivot through which the two spheres interact, and much narrower than the whole picture. Though it conflicts with the seemingly all-embracing mainstream “Economic Imperialism” world-view, the world-view we propose here covers a broader ground than the mainstream view.

From its biophysical foundation to the institutional dimension

Ecological Economics has fully expounded its view that the economy is a subsystem of the ecosystem. Among all many other advocates of heterodox economic theories with intent to initiate a paradigm shift, the conceptualization of Ecological Economics is somewhat more comprehensive, and in our view is best able to lead a more profound economic paradigmatic revolution. However, the current Ecological Economic framework lacks an adequate social dimension. Specifically, it lacks the theoretical underpinnings and the needed proposals for institutional structures to address the issues around sustainable development.

Ecological economists don’t claim the subject to be a pure natural science. They have realized the importance of institutional factors. Costanza and Daly have emphasized the importance of integrating Ecology and Economics, in other words, of integrating the human and ecological factors into Ecological Economics. However, they also acknowledged that they were just a few steps beyond the beginning by then (Costanza, 1989; Costanza and Daly, 1987). The word “integrate” is quite ambiguous; the exact, specific relationship between should be determined accordingly and adjusted in the process. As Von Heland and Folke (2014) pointed out: “neither ecosystem nor culture delivers ecosystem services to society. Ecosystem services are generated by an interdependent social-ecological system in which knowledge, practice, and beliefs coevolve: culture is a key factor in their generation and persistence.” However, all existing frameworks haven’t fully integrated the biophysical foundation with institutional framework. Hall and Klitgaard (2006) summarized the interaction pattern between ecologists and economists, social and ecological wings of Ecological economists: “the relatively rare collaboration between ecologists and economists often had the ecologists doing their ‘nature-based thing’ while the evaluative procedures were turned over to economists.” As Kolinjivadi (2019) stated, the essence of such a pattern is that “while Ecological Economics brings biophysical metrics, such as embodied material and energy or ecosystem services into considerations of economic production, society is reduced to the stock-flow accounting of economic production. The possibility of society as spaces for transforming the meaning of ‘nature’ and in co-producing and continuously transforming socio-natural relations through economic activity is left poorly theorized.” In other words, inconsistencies exist in Ecological Economics between the biophysical foundation and the institutions which manages the biophysical process.

Current discussions about the institutional dimension by Ecological economists mostly took place in the school of Political Ecological Economics, which advances further away from the interaction between the ecosystem and the economy and toward evaluating political and social impact on such interaction. According to scholars in this field, discussing the interaction between the economy and the ecosystem alone is far from enough. If we cannot carry the revolution forward into the larger sphere of society and politics and renovate the subject ideologically, the vast theoretical space of Ecological Economics will be compressed by the dominance of mainstream theorists, and ultimately reduced to a mere applied branch of mainstream Economics (Spash, 2013; Spash and Aslaksen, 2015). Some scholars have proposed that we might bring the subject into the bigger world of society and politics by grafting in Marxism (Burkett, 2006) or Institutionalism (Gendron, 2014). However, few of those scholars have successfully integrated the biophysical insights of Ecological Economics into their framework.

Soddy and Daly gave us inspiration on how to integrate institutional and biophysical spheres of Ecological Economics. Soddy pointed out the inconsistency of debt as an accounting concept and wealth as a physical concept. Herman Daly suggests that the proposal of negative natural interest rate is a signal that debt can no longer grow since the economy has overstepped its biophysical boundaries. Daly suggests reform on the fractional reserve banking system under fiat currency, which is the stimulator behind the growing debt and uneconomic growth (Daly, 2014: 203–205, 221–202). The biophysical cost of monetary policy is a topic with potential, but not yet fully discovered.

Based on the challenges that Ecological Economics poses for Neoclassical Economics theorists, as we have summarized above, to integrate institutional and biophysical perspectives, three major questions should be answered:

First, in reference to the biophysical base and limits, the institutional sphere of Ecological Economics should explore the ethical base and limits to economic activity, such as the root of our preference, the impact of social relationships on our decisions, humanity’s relationship with other species and the ethical obligations between different generations.

Second, to untangle the interaction between book debts and real wealth, it is essential to discuss the mechanism of credit creation and money circulation under the credit currency framework, as well as its impact upon how the economy extracts and transforms material and energy. From a historical perspective, it is essential to study how the transformation from metal currency to credit currency changed the efficiency of the economy as it extracts material and energy. It is also essential to study how the dynamics of credit currency interact with the dynamics of material and energy.

Third, echoing the research which dissects the economy by material-energy-money flows, it is necessary to discuss how this material-energy-money flow pattern interacts with political and ideological factors. Historically, how exactly has such a pattern been formed and strengthened by the material-energy-money flow, and what should a fairer, more sustainable international economic pattern be like.

Most of the issues above are proposed by Ecological Macroeconomists (Rezai and Stagl, 2016), and we think linking the institutional dimension to the biophysical dimension of the economic process is the key to promote Ecological Economics to a new stage.

Concluding remarks

Through tracing the philosophical foundations of Ecological Economics back to its root in Classical Economics, we find that the materialistic, or biophysical, aspect of the economy used to be emphasized by economists, but were ignored and suppressed at the time of the marginalists revolution when mathematical economic models in analogy to Newtonian mechanics were developed. Such a strategy, though criticized by early masters of the subject, now occupies the dominant position among economic theories, and incorporates all the challengers into itself simply by adding new variables into the model.

The challenge from Ecological Economics distinguishes itself from its predecessors by its fundamentality. Ecological Economics revives the biophysical insights of Classical Economics, and fundamentally challenges mainstream economic theories by arguing that the economic process, in its essence, is a biophysical process. Thus, the theoretical economic framework developed in analogy to static Newtonian mechanics is ill-equipped to meet the dynamic and evolving biological issues around sustainable development, which is the problem of our epoch most urgently in need of resolution.

However, inconsistencies between the social and ecological spheres of Ecological Economics barricade progress. When entering into the social, especially institutional, sphere of the economy, Ecological economists always utilize the translated and mainstream version of biophysical insights—the version filtered through monetary analysis. From our perspective, the whole economic process, in other words, the whole process of how the human society extracts and distributes energy and material while discharging waste, is a biophysical process and not a purely monetary process. Economic policies carry extremely important biophysical implications. Herman Daly’s discussion on the biophysical implications of monetary policy is a good start. Further discussions relating the biophysical and institutional spheres should be promoted.

In short, we propose that Ecological Economics should always revisit its biophysical foundations. A sustainable economic institution, which balances longevity and prosperity, the needs of the present and future generations, human beings and other species, should be built upon solid biophysical foundations.

Footnotes

Acknowledgements

The authors thank Garvin Boyle for his help in proofreading this essay.

Declaration of conflicting interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This research is jointly supported by the Natural Science Foundation of China (Grant No. 71673014 and No. 71973008), and the Philosophy and Social Sciences Major Project Fund of the Ministry of Education (Grant No. 18JZD029).

ORCID iDs

Xi Ji

Zhen Luo

Notes

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