Beyond the passage to a new year, 31 December 2022 marked the end of the deadline given by the Paris Administrative Court to the French State to act to limit its greenhouse gas emissions[1]. However, according to the associations that initiated what is now known in France as the “Affair of the Century”, the measures taken so far have been insufficient[2]. Besides, 2022 is ending with record weather conditions. According to Météo France, “the night of 30 to 31 December was the mildest ever observed in winter since records began in 1947″[3] (in France). Faced with this observation, some people see the economy as an obstacle to ecology. Yet it is no coincidence that these two terms have the same root (“eco” comes from the Greek “oikos”, which means house, household). In this article, we offer an introduction to the school of thought that seeks to link economics and ecology, ecological economics.
What is ecological economics ?
Ecological economics is a branch of economics that consists of thinking about the economic sphere from the environmental sphere, and thus from natural sciences. It distinguishes itself by its focus on nature, justice and time, and addresses issues such as intergenerational equalityand the irreversibility of environmental change. Georgescu-Roegen’s work, notably in The Entropy Law and the Economic Process (1971), on what he called the ‘bioeconomy’ is often perceived as a precursor to the discipline. One of the main discoveries of the Romanian mathematician, statistician and economist was that orthodox economic theories do not respect the principles of thermodynamics, and in particular the second law of thermodynamics which deals with the notion of entropy.
Thermodynamics and economics
In thermodynamics (a branch of physics), entropy can be seen as a measure of the degree of disorder in a system. The higher the entropy of a system, the less orderly its elements are, the less mechanical effects they can produce, and the greater the proportion of energy that is unusable for work.
“The Law of Entropy is in its nature the most economic of all physical laws” – Georgescu-Roegen
According to Georgescu, the economic process consists in transforming material and energy of low entropy, i.e. raw materials and usable energy, into material and energy of high entropy, i.e. waste and heat. He also notes that the Earth is an open system in terms of energy but not in terms of material. In other words, the Earth system can receive low-entropy energy from its external environment but not low-entropy material (since “matter from meteorites comes to us in an already dissipated form”).
From this he concludes that the economic process is based on the use of mineral resources that are both irreplaceable and non-renewable, and that the realisation of a perfectly circular economy is in practice impossible (since despite Einstein’s equivalence E=mc², it is in practice impossible to transform energy into matter).
Repositioning the sphere of the economy in the sphere of the environment
In general, the ecological economics school of thought distinguishes itself by using knowledge from the life and earth sciences to think about the economy. This includes thinking of finance as a subset of the economy, the economy as a subset of society, and society as a subset of the environment. It’s is in fact the strict opposite of the neoclassical vision which tends to see finance as what should control the economy, the economy as what should control society, and society as what should control the environment. This difference in vision can be summarised by the following diagram from a report by the Shift Project[4]:
A notable example of work in ecological economics that follows this view is Kate Raworth’s Doughnut Theory. The first and best-known principle of this theory relates to what the purpose of the economic discipline should be. According to ecological economists, economics is “the collective organisation of contentment, or at least of the material conditions of contentment.” [5] . Since the economic sphere is included in the environmental sphere, the economy must strive to organise contentment within the new planetary boundaries[6].
For Kate Raworth, this goal of organising contentment to satisfy planetary boundaries can be summarised schematically as a Donut:
Conclusion
Economy comes from the Greek “oikos” and “nomos”, and thus etymologically means the management of the house. In the course of history, the scope of this management has gradually increased. Thus, Adam Smith was interested in the management (or wealth) of nations. What ecological economics proposes to do today can therefore be summed up as a further increase in the scope considered by economics. The ecological economy is the management of the house we all share, the planet.
At Neuroprofiler, we offer a financial education platform, EduProfiler, which just makes investors aware of different economic and financial concepts. Thanks to its very flexible design, we can adapt its content according to the demands of our clients. For example, it is possible to have a version of our EDUprofiler dedicated to the ecological economy or to sustainable investment.
Ressources
[1] Ralentir ou périr – Timothée Parrique, September 2022
[2] The nine planetary boundaries are thresholds that must not be exceeded in order to ensure the survival of humanity on Earth. They have been defined by scientists at the Stockolm Resilience Center
[3] Climatsup Finance, Former pour une finance au service de la transition – The Shift Project, December 2022
[4] http://paris.tribunal-administratif.fr/Actualites-du-Tribunal/Espace-presse/L-Affaire-du-Siecle-l-Etat-devra-reparer-le-prejudice-ecologique-dont-il-est-responsable
[5] https://laffairedusiecle.net/au-31-decembre-2022-laction-climatique-de-letat-aura-ete-insuffisante/
[6] https://meteofrance.com/actualites-et-dossiers/actualites/climat/un-passage-la-nouvelle-annee-exceptionnellement-doux