Living Within the Bounds of the Natural World Joshua Farley Community Development and Applied Economics Gund Institute for Ecological Economics University.

Living Within the Bounds of the Natural World

Joshua FarleyCommunity Development and Applied

EconomicsGund Institute for Ecological Economics

University of Vermont

Ecological Boundaries and Agriculture

Market Solutions?

Negative externalities Must be internalized for

efficient allocation Monetary valuation

(implies substitutability) How do we account for

changing values? Army of technocrats

providing data to politicians?

$

$

Essential and Non-substitutable Resources

Food, water, energy, ecosystem services Essential to human survival with no

adequate substitutes Critical thresholds

Ecological Physiological

Inelastic demand Large changes in marginal value with

small changes in quantity

Ecological Boundaries and the Supply Curve

Must sum together all costs: labor, capital, biodiversity loss, nitrogen, climate change, etc.

(marginal cost)

Economic output (fossil fuel economy)

Social/Physiological Boundaries

Physiological Boundaries/Thresholds and the Demand curve

Value: low and stable

Trade-offs: relatively unimportant benefits

Value: shift from marginal to total value (e.g. diamond-water paradox)

Trade-offs: Life sustaining benefits

Value: Increasing rapidly with decreasing quantity.

Trade-offs: Resilience, increasingly important benefits

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Economic output (fossil fuel economy)

Irreconcilable Thresholds?

Economic output (fossil fuel economy)

Market demand in an unequal world

Competition and self interest Americans spend 6.7% of income on

food for home consumption 11.6% of food dollar goes to farmers <1% of income spend on raw food How did you react when wheat prices

tripled? Elasticity of demand to retail prices ~.08

Implies ~.001 elasticity of demand to raw food prices

Market demand in an unequal world

Many poor countries spend >70% of income on food for home consumption Perhaps 50% spent on raw food? How do poorer countries react when

wheat prices triple? Arab spring

Elasticity of demand ~.7 Budget share and elasticity

Market Demand, Unequal World

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Trade-offs:Starvation now or in future

Sustainability and justice vs. preferences

Market Supply and Demand

Marginal market costs(Market supply curve))

Poor people have no demand

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Market Allocation of Essential Resources on an Unequal Planet

Does it maximize utility? The perversion of utility

Is it efficient (Pareto efficiency)? Would it be possible to re-allocate food from obese

people to malnourished people without making anyone worse off?

Do we need to make subjective value judgments to answer this?

Do we want to apply this logic to non-marketed ES?

Objective needs should take priority over subjective preferences weighted by purchasing power

Market Equilibrium on a Full and Unequal Planet?

Equilibrium result of negative feedback loops Scarcity price increase decrease in demand; increase in

supply equilibrium No prices for non-market goods

Essential resources Price increase decrease in demand

Finite resources on full planet (food, energy, land, stocks) Price increase increase in supply (or only at cost of future

supply) Speculation

Price increase increase in demand Dis-equilbrium, redistribution from positive feedback loops

Market Equilibrium on a Full and Unequal Planet?

Growing concentration of wealth stimulates speculation

Speculation breakdown of market mechanism Inequality Instability

Complex system Negative and positive feedback loops,

non-linearity, surprises, etc.

Who benefits from speculation?

HEADLINE: Despite Drop in Commodity Prices, Farmland Values Rise

19x$

19$+i

19$+p+i

$

19$+p+

i

19$+2p

19$+2p

19$+p + i +i’

Solutions

Redefining Goals: Efficiency

What is efficiency? Ratio of benefits/costs

Agriculture Food production/land; food/labor Most efficient system ever?

Energy in, energy out?

Economics diminishing MB, rising MC. MC=MB Pareto efficiency Maximizing monetary value How do we do this for food?

Ecological Economic Efficiency

What is the desirable end? Normative judgement

What are the costs?

economic technical ecological efficiency efficiency

efficiency

• Allocative efficiency• Producing the right foods with

the right resources on the right land• Taxes and subsidies?• Land use inherently competitive

• Distributive efficiency• Ensuring these foods go to those

with the greatest physiological need• More equitable distribution of

wealth?• Alternatives to price rationing?• Competition for food

• Brazil, India, small farmers

Food Security

• Throughput broadly defined• Water, energy, fertilizers, labor, capital,

land• Cannot rely on non-renewables

• Requires major investments in R&D, extension

• How do we minimize costs of developing new technologies, maximize benefits?• Economics of information• Land grant universities• Markets fail to account for future generations,

negative externalities, public goods• Competition and price rationing inherently

inefficient• Cooperation required

• Agroecology and on farm throughput

• Minimizing impact of throughput on ES• Minimizing agrotoxins, fossil fuels, erosion• Non-market benefits• Open access and public goods• Cooperation required

• Perennial polyculture, agroecology• Restoring ecosystem services

Sustainable Money: Vertical money, 100%

fractional reserve, green taxes

$Taxes, AEAs

$ $

Summary & Conclusions

Markets fail to account for ecological degradation

Markets fail to distinguish between needs and wants Bad idea to extend them to ecosystem services

Markets promote unsustainable, unjust and inefficient agricultural systems

Markets increasingly dominated by destabilizing, inequality inducing speculation Changes over last 40 years

Summary & Conclusions

Must define appropriate goals for economic system on crowded, finite planet

Must understand resource characteristics Non-rival, non-excludable, interdependent

Appropriate economic institutions based on resource characteristics and goals

Cooperation required to solve ecological problems, achieve just distribution, produce required technologies

Current System:Vertical money

$taxes

$

$

profits

Current System: Horizontal Money

What if there’s a great lending opportunity, and bank has already lent 19$?

Where do i (interest) and p (profit) come from?

More loans or more vertical money required. ECONOMIC GROWTH (physics and ecology)

What if p<i? Procyclical monetary system (positive

feedback loops) Inherently unstable

19x$

19$+i

19$+p19x$

$