Key insights and ideas for thirteen core topics in economics, organised by selecting the most relevant theoretical approaches per topic and contrasting them with each other.
This chapter provides a map through the complex jungle of economic theories. There are many different theoretical approaches, and each aspect of the economy has been analysed by a number of different ones. However, it is neither feasible nor productive for students to engage with every possible angle for every topic. Hence, the chapters on different topics, together with Building Block 8: Economic Theories, sets out an alternative approach: pragmatic pluralism. Rather than pursuing the extreme of either only focusing on one approach, or including every possible strand of thought for every topic, we propose a pragmatic middle ground: teaching a select number of approaches for each topic. In this way, it is possible to introduce students to the variety and diversity of economic thinking, whilst still having enough time and space to properly discuss each of the insights in detail with them.
As human beings we are only one form of life living on this planet. In the early history of humankind this meant that we had to adapt to our environment. Later, we learned how to adjust our environment to serve our needs. This process has gone so far that many scientists have proposed naming the current ecological era “the Anthropocene”, implying that human beings are currently the main cause of changes in the Earth’s natural systems. But how can we best understand the relationship between humans, their economic activities and the natural world around them? How does nature influence the economy and what role do natural resources and land play in the economy? And currently also very important: how does the economy influence nature?
Main opposing perspectives
■ Ecological economics: The economy is embedded in nature
■ Neoclassical economics: Natural resources are key inputs for production
Main complementary perspective
□ Classical political economy: Land and natural resources generate rent
Additional perspectives and insights
+ Institutional economics: The tragedy of the commons can be overcome
+ Other: Policy ideas to tackle climate change
Main opposing perspectives: Ecological economics and neoclassical economics
There are roughly speaking two conflicting perspectives on environmental issues, an extractive and an embedded view. The former view, held by neoclassical economics, often called environmental economics, thinks of nature as natural resources which should be extracted to maximise utility. Environmental problems are seen as externalities which should be addressed through efficient government intervention. In this line of thinking, the monetisation and marketisation of nature poses no problem. Instead, it is often thought to be the solution to environmental issues, as monetisation internalises nature into market decision making. Emission trading schemes, for example, give companies the right to buy and sell permits to pollute and damage the earth.
Ecological economics, on the other hand, argues that the environment in which societies and their economies are embedded is central to their functioning. In this view, capturing ever more of nature into economic processes poses a problem, as it will likely destroy the nature on which the economy is dependent. Ecological economists thus argue to consider the limits of the physical world when setting economic goals, such as growth. This leads to what is called strong sustainability, which argues that natural capital cannot be replaced by other forms of capital. In contrast, environmental economists argue for weak sustainability, the idea that growth in human capital can substitute for the shrinkage of natural capital.
Main complementary perspective: Classical political economy
Nature and the land were historically at the core of economic thinking and attention has shifted back in this direction recently, mainly because of the climate emergency. In the 18th century, French Enlightenment thinkers believed that all value originated from nature through agriculture, and their approach was therefore called physiocracy, from the Greek for “government of nature”. All other sectors were thought only to be able to reproduce the value put into it. Classical political economists build on these ideas, but argued that manufacturing also creates value. Both physiocrats and classical political economists, however, agreed that the landowners extracted value from the economy by collecting rent on the land they owned. Collecting rent was seen as value extraction because the landowners, in contrast to the agricultural workers, contributed almost nothing to the production process. Hence, the term to refer to striving for unearned income in general, bears the name rent-seeking. The concept of rent-seeking has also been applied to finance, intellectual property, platforms, contracts, infrastructure and natural resources. The concept of rent in the classical tradition is somewhat distinct from the neoclassical understanding, as the former refers to unearned income coming from the ownership of a scarce asset without engaging in value creation and the latter refers to excess profits above the normal level thanks to preventing market competition. In neoclassical theory and spatial economics, land has been central to location theory which tries to model ‘optimal’ locations for economic activities.
Based on the classical ideas, Henry George argued that unearned income coming from land ownership should be taxed as its value belongs equally to all members of society, not only its owners. In Rethinking the Economics of Land and Housing, Josh Ryan-Collins, Toby Lloyd, and Laurie Macfarlane analyse how the role of land and housing has changed over time, up to the present day. In doing so, they point to the changing use of land and its financialization as important recent developments. There is considerable debate about how widespread rent-seeking is in today’s economies and what the government, and competition authorities in particular, should do about it.
Additional perspectives and insights
Institutional economics: An important topic within ecological and environmental economics is the commons, which are resources and land that are held in common, instead of being owned and controlled by individual private actors or a state. Research on this topic builds on ideas, such as primitive accumulation by Marx and fictitious commodities by Polanyi. A recent important contribution is by Elinor Ostrom, who analysed how and why commons can operate successfully. This is in contrast to the neoclassical idea of the tragedy of the commons, which argues that commons will fail and should be commodified because it is in the self-interest of individuals to deplete shared resources, overcoming the so-called collective action problem. Ostrom shows how communities prevent such resource depletion with the help of informal norms and social practices. Furthermore, she argues that local discussions and meetings can generate more awareness and senses of shared responsibility about ecological issues, triggering more sustainable behavior without market and state action.
Other: Policy ideas to tackle climate change
As the understanding of the urgency of the climate crisis was growing, an increasing number of economic approaches have been developing ideas on how to tackle it. The ecological approach emphasizes the need to reduce material consumption and engage in direct regulation. The neoclassical approach focuses on getting the price right through market-based policies, most importantly with a Pigouvian carbon tax or a Coasean emission trading scheme. Neoclassical economics analyses the two policies in a static framework and concludes that because emission trading schemes allow firms to trade pollution permits, it is more (cost) efficient in achieving the emission reduction. Complexity economics uses a dynamic approach and concludes that while emission trading schemes create balancing feedback loops which after the initial emission reduction fail to incentivize further decarbonisation, carbon taxes trigger self-reinforcing feedback loops which continue to incentivize further decarbonisation, also after initial reductions. Keynesian economists emphasize the need for green industrial policy and government spending, through deployment subsidies and infrastructure investments, to achieve the transition towards a sustainable economy as there is a lack of private demand for environmental-friendly products. Evolutionary economists have focused on the need for innovation in clean technologies and therefore advocate for more government investment in research and innovation.
Chapters & Papers:
- Economics After The Crisis by Irene van Staveren, from 2015, chapter 13 This well-written textbook sets out the neoclassical, post-Keynesian, social economic and institutional perspectives on nature.
- Introducing a New Economics by Jack Reardon, Maria A. Madi, and Molly S. Cato, from 2017, chapter 3. This ground-breaking textbook introduces the environment, resources and sustainability and weaves together pluralist theory and real-world knowledge.
- The Economy by The CORE Team, from 2017, chapter 20. This successful textbook provides an introduction into economics of the environment.
- Principles of Economics in Context by Jonathan Harris, Julie A. Nelson and Neva Goodwin, most recent edition from 2020, chapters 13, 21, and 33. This useful textbook, which pays particular attention to social and environmental challenges, devotes three chapters to the environment, broader measurement, and sustainability.
- The Routledge Handbook of Heterodox Economics: Theorizing, Analyzing, and Transforming Capitalism by Tae-Hee Jo, Lynne Chester, and Carlo D’Ippoliti, from 2017, chapters 16, 30 & 31. This broad and diverse book sets out a variety of theories on nature, energy and the environment.
- The Handbook of Economic Sociology by Neil J. Smelser and Richard Swedberg, from 2005, chapter 30. This extensive and yet accessible book for non-sociologists, provides an impressive and useful overview of the field of economic sociology, including a chapter on the economy and the environment.
- Polycentric systems for coping with collective action and global environmental change by Elinor Ostrom, from 2010. This article, written from an institutional perspective, argues for tackling climate change on multiple scales and levels, rather than focusing only on global efforts, as this can prevent inaction and allow for more experimentation and learning.
- A review on circular economy: the expected transition to a balanced interplay of environmental and economic systems by Patrizia Ghisellini, Catia Cialani, and S. Ulgiati, from 2016. This article provides an overview of the literature on the circular economy.
- Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd, and Laurie Macfarlane, from 2017. This accessible book introduces students to classical and modern theories of land and housing, including concepts as economic rent and financialization.
- Environmental and Natural Resource Economics: A Contemporary Approach by Jonathan M Harris & Brian Roach, from 2002. This textbook introduces students to the neoclassical and ecological approaches to nature and environmental issues.
- Ecological Economics: Principles And Applications by Herman E. Daly and Joshua Farley, from 2003. This textbook introduces students to ecological economics and the economics of nature and resources.
- Dimensions of Environmental and Ecological Economics by Nirmal Chandra Sahu and Amita Kumari Choudhury, from 2005. This collection of essays provides an overview of the neoclassical and ecological theories of nature and the economy.
- Routledge Handbook of Ecological Economics: Nature and Society by Clive L. Spash, from 2017. This collection of essays introduces students to variety of theoretical approaches to nature and the economy, from ecological and neoclassical economics, to institutional, feminist, Marxian, post Keynesian and evolutionary economics.