Shifting Paradigms: Embedding the Economy in Nature

By Maneesha Kaur

There is a specter haunting the field of economics, and it’s climate change. 

More often than not, the mainstream neoclassical economics neglects the issue of environmental sustainability. The economy relies on the environment for inputs of natural capital, as well as for absorption of waste and pollution created from economic activities. However, the mainstream paradigm often considers the economy as operating outside the environmental context and simply relegates pollution as an ‘externality’. This neglect of environmental issues in economics is a serious problem that must be tackled if we want to ensure future generations inherit a livable planet and also enjoy a relatively good quality of life. 

The Economics in Context Initiative aims to address this critical limitation in the mainstream curriculum with modules that integrate environmental issues into the study economics.

Figure 1: Contextual Model of the Economy

Source: Neva Goodwin, et al., Macroeconomics in Context, p. 71

Take for example, the two modules on ‘Microeconomics and the Environment and ‘Macroeconomics and the Environment’. Both modules can be used as stand-alone supplements to a standard micro- or macroeconomics course. Just by including these modules, students can gain an insight into some of the key issues on environmental sustainability and its importance in economics. 

More specifically, the ‘Microeconomics and the Environment module, by Brian Roach, Erin Lennox, and Anne-Marie Codur, presents an introduction to the economic analysis of environmental issues, by providing a broader perspectives on sustainability. Standard environmental economic concepts, such as externalities, management of public goods and common property resources, and different approaches to valuing the environmental costs and benefits are discussed. Applications include fisheries management, sustainable agriculture, and global climate change.   

The environmental impacts of economic activities have been increasing over time and issues of resource supplies and limits and flows of waste and pollution are becoming increasingly important in economic analysis. Hence, understanding environmental challenges from a macroeconomic perspective is crucial to students’ forming a fully integrated view of the economy.

The module ‘Macroeconomics and the Environment’, by Erin Lennox, Jonathan M. Harris, and Anne-Marie Codur presents an expanded circular flow analysis that takes the biosphere into account. This module highlights the importance of including measures of environmental quality in accounting of human well-being and reviews critiques and alternatives to Gross Domestic Product. It discusses the implications of long-term growth of population and economic output, contrasting the goal of economic growth with the goal of sustainable development. Issues of ecosystem limits and the influence of affluence, population, and technology on economic and environmental outcomes are discussed. Macroeconomic theory and policy are discussed with specific focus on recent data and figures on transitioning to a green economy.  

Following on these introductory modules, Eric Kemp-Benedict’s module Green Macroeconomics: Growth and Distribution in a Finite World’ provides an intermediate level overview of the field of green macroeconomics, with a focus on the long-term prospects for sustainability. It presents a model of the economy, where the economy is embedded in society, which in turn is embedded in the environment.

The module takes a pluralist approach, contrasting neoclassical, post-Keynesian, and classical theory, to introduce a useful and generic approach to macroeconomics that recognizes the limitations set by planetary boundaries. It presents a classical model of growth and distribution and extends this model to include natural resources and concepts from biophysical economics. Topics include climate mitigation and adaptation, renewable resources, and energy return on energy invested. An explicit green macroeconomic model is developed over the course of the module to explore the consequences of shifting from a fossil-based economy to renewables.

For instructors interested in focusing on the issue of climate change, The Economics of Global Climate Change’ module by Jonathan M. Harris, Brian Roach, and Anne-Marie Codur provides an overview of some of the key concepts and challenges associated with climate change. It discusses the scientific evidence on climate change, including recent projections on temperature and sea-level rise and evaluates the strengths and weaknesses of economic analysis of climate change, including discussion of valuation of environmental damages, carbon taxes, tradable permits, and current policy issues. The module highlights the importance of tacking climate change at a global level, given that it is a global challenge and policy solutions must include cooperation at the international level. It includes discussion on recent developments in science and policy, based on reports of the Intergovernmental Panel on Climate Change, the 2015 Paris Agreement on climate change, and new information on carbon storage in soils and forests. 

Another environmental issue that is largely neglected in the mainstream curriculum is the importance of land as a fundamental resource for economic activities. While “land” is included as a factor of production in neoclassical analysis, the fact that it can be used up and polluted is not considered. The module ‘Land Economics and Policy’ by Ekaterina Gnedenko focuses on the need to consider resource management as an essential economic activity, providing an introduction to some of the key concepts and policy discussions on land economics. It presents an overview of economic theory on land management and considers some of the main environmental impacts of current land-use practices. It also delves into questions of economic efficiency of markets for land and distributional equity in access to land resources. The materials also explore the role of institutions and property rights in allocation of land resources and presents current policies on land-use.

Perhaps a panacea to these problems is an alternative approach to development that is not centered on GDP growth as the primary goal of the economy. ‘Alternatives to Growth-Centric Development’ by Erin Lennox and Rebecca Hollender considers the problems of environmental degradation and inequality in relation to growth-centric development. The module presents perspectives on alternatives to growth along with related policies, practices, and challenges to emphasize the need to limit economic activity to within the biophysical limits of the planet. It features extensive case studies on alternative approaches in both the Global North and Global South. Perspectives from the Global North focus on theories and applications of the steady state economy, de-growth, and green growth, while perspectives from the Global South include examples such as Sumak Kawsay (Buen Vivir) in South America, and Eco-Swaraj and Radial Economic Democracy in India.

In recent years, there has been increasing concern about the neglect of environmental issues in mainstream economics. The modules on environmental issues in economics developed by the ECI address this problem by providing instructors with excellent resource to add to their curriculum. 

More information on the Economics in Context modules is available here.