An Introduction to the Economies of Nature. Rosario Pérez; Sophie Ávila and Alonso Aguilar

The Institute of Economic Research series Breviaries has the merit of contributing, in simple language, subjects at the forefront of economics. This edition offers a theoretical examination of the environment as an issue, with an outline of a debate increasingly attracting the attention of economists. The book covers the main concepts developed in this area from three approaches: the economics of natural resources; environmental economics and ecological economics. The first two are based within neoclassical tradition and the last is presented as “different and complementary” to this (p69). Didactically, and yet without losing rigor in presenting the main authors in each area, the text considers how economic science handles the relationship between human activity and its environmental impact. It is worth noting that at least two important contributions are not included in the outline put forward: ecological economics from a Marxist-revolutionary perspective, which is found in the work of John Bellamy Foster and followers, and the contribution of Latin American social thinking on “living well,” whose promising development is devised by economists such as the Ecuadorian Alberto Acosta.

The first chapter outlines Harold Hotelling’s works of 1931, as the origin of neoclassical economics addressing the theory of environmental issues, identifying the well-known Rule of Hotellingas one of the fundamental equations of the economics of natural resources, this being that “the optimal depletion rate of a non-renewable resource is the rate at which the increase of the resource price is equal to the rate of discount to society” (p.27). Among the principal findings in this area which arose after Hotelling’s seminal article, we can highlight discussions on the effects of economic growth on natural resources; the distinction between renewable and non-renewable resources and social preferences over time; what would be strong or weak sustainable development(given that nature and its elements are, in the case of the latter, or are not, in the case of the former, substitutable for native goods or services from human activity and technological advancement); and the importance of institutional reform for environmental conservation. Special attention is given to the issue of resources that have free access, i.e. those where the quantity and time of extraction are not “protected” by a private property regime. In this context, “externalities are often observed; given that nobody possesses or controls the total quantity extracted, nobody has incentives to look after the resource and everybody tries to extract the maximum possible before others do so” (p.30). The discussion is then raised of how governments and users can co-manage these resources. This dilemma is clarified by Elinor Ostrom’s contribution. Where neoclassical theory tries to incorporate the environmental question under the auspices of individualism and rationality as precepts, the last part of the chapter describes the basic elements of game theory, highlighting that two variables are added to the initial concerns: interdependence and information. This focus is broadened; now decisions on maximizing the utility and minimizing the costs of the agents (consumers, producers and governments) are influenced by the strategy that the other assumes. In this way, the moral risk and adverse selection, two market flaws stemming from asymmetric information, are also observed in the relationship between environmental policies (subsidies and/or other incentives to combat contamination) put in place by the government and the answer given by those using the natural resources.

Environmental economics are presented in the second chapter as a field of applied neoclassical economics, punctuated with consumer and company macroeconomic theories of environmental issues. In this respect, supported by Charles Kolstad, “environmental economics is concerned with the effect of economics on the environment, the environment’s significance for the economy and with ways of regulating economic activity so that there is balance between environmental quality and economic and social interests” (p.30). It’s origins are traced to the works of the group Resources for the Future in the 1950s, and in contentious involvement in the environmental movement in central countries in the 1970s. The key area of research is based on three themes: the importance of environmental decline, the causes of this and the creation of economic incentives to correct and detain the effects of this decline. Thus he defends the need for a benefit that serves as economic stimulus so that those responsible for contamination and pollution reduce it. In summary, this chapter presents the different solutions offered by neoclassical economics, expressed as environmental economics, to internalize the damage to nature and its abstract models, thus seeking to measure and achieve the desired economic balance, but this time expressing what would be “an optimum level of contamination” (p.56). Criticism of this focus centers on innocuousness in the creation of markets –as is the case with the carbon dioxide emission rights market –, in reverting contaminating effects and its misuse to feed unwanted financial speculation.

The third chapter is dedicated to ecological economics. This approach seeks to address the deficiencies of neoclassical economics, in a complementary manner. It may thus be defined as “the science that studies the integration of environmental, social, economic, political and ethical variables” and whose principals “are the laws of thermodynamics, although economic processes and other variables of a social and political nature are also included” (p.73). Despite identifying its origins with French physiocrats, the book indicates that the bases of this trend were laid with the works of Sadi Carnot and Rudolph Clausius, the latter introducing the concept of entropy. The book’s key concepts are: ecosystem and energy flows (and the definition of mature ecosystems or low entropy); biodiversity (given that where this is most abundant, there is greater capacity for the system to recover from damage, its capacity for resilience); health of ecosystems and the load capacity or “the maximum population a particular habitat can support indefinitely without causing permanent damage to the productivity of the ecosystem it depends on” (80). The key issues raised relate to the following: (a) scale, given that sustainability must be considered within a local, regional and global context; (b) fair distribution of natural resources among people and inter-generations; (c) efficient allocation, which includes opportunity costs of declining ecosystems within the price system ; (d) complementarity/ substitution between natural capitaland the possible synthetic substitutes to this; (e) economic growth and development and deterioration of natural capital; and (f) how to measure social wellbeing, given that conventional national accounting indicators do not take environmental decline into account (for this the ecological domestic product has been suggested). Finally, different views on the treatment of ecological economics vis-à-vis environmental economics are considered, relating those with a theoretical basis to opinion on natural capital, economic valuation of natural resources, population growth and the causes of environmental decline and its impact on wellbeing.

The book does not have a specific conclusion section, however it satisfactorily meets the initial objective of outlining the main trends in economic theory that dominate the debate on the relationship between the environment and economic models. The book thus promotes the dissemination of academic literature on this very current issue.

Monika Meireles
Faculty of Economics, unam