Saturday 14 July 2012

Does mainstream (neoclassical) economics agree or disagree with the core concepts of sustainability? Why?


In 1972, a book called “The Limits to Growth” was published by using systems dynamic theory and computer model “World3”. The book presented with various scenarios on environmental outcome for the world from 1990 to 2100 detailing how humans have exploited world’s scarce resources and produced waste and pollution faster than the capacity of the earth to absorb them. Soon after the Limits to Growth, in 1987, Brundtland report “Our Common Future” stated “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (World Commission on Environment and Development: Our Common Future, 1987) and also highlighted two most important concept of needs of the poor and the ability of environment to meet our needs of today and tomorrow. Three core pilars of Sustainable development is environmental, economic and social well-being of present and future generations.  Ecological sustainability requires fair distribution of resources between current and future generations and with other species that are living on this planet. Classical economist; very much broad-minded philosophers and economist “Adam Smith, David Ricardo and Thomas Malthus” referred economics as “political economics”. Neoclassical economics provides theory by which marginal costs of goods and services decide their supply and consumer preference decides their demand. Since 1970s there has been reference to “mainstream economic approaches” – “seemingly heterogeneous set of approaches that include new institutional economics, new information economics, social choice theory, behavioral economics, evolutionary game theory, experimental economics and many others”  and are debated by many in last few decades; David Colander declared the “death of neoclassical economics”  while introducing economics of today, Madra who is classifying as late neoclassical economics  and Davis in his journal refers to as ‘recent economics’ .
Let us now explore some of the matters that suggest neoclassical economics does agree. Theory of neoclassical economics has been well received and followed around the world since last many decades. Mainstream (neoclassical) economics provides us with conceptual framework and ideas about “efficient allocations of resources”. “The Invisible hand” when markets are not regulated by power (regulations) provides seamless functioning markets that helps to distribute resources, wealth and labor more efficiently compared to markets that are governed by regulators . For the very same reason economist rely on “the invisible hand” of unrestricted markets for the efficient utilisation of scarce resources (natural and human). If market fails to reduce environmental issues, those who excel in environmental economics pursue an optimal balance between total cost including environmental and social and economic benefit with the help of ‘market instrument’ of social cost internalization  Eco-efficient process and productions that are alternative to conventional productions are considered efficient and helpful in continuous growth. In neoclassical economics markets is viewed as main vehicle and as suggested previously “invisible hand” will drive the change with some adjustments in regards to the externalities or core concepts of sustainability. Neoclassical economic approach can be applied to environmental and sustainability issues provided all natural resources and other environmental and social effects that are priced,  once priced; cost benefit analysis can be deployed. Today in many cases ‘market failure’ happens from sustainability perspective and it is mainly due to social and environmental aspect of market is not priced. If sustainability defined its limit and priced every externality; the framework of mainstream (neoclassical) economics can be used without any market failure.
Let us now explore some of the matters that suggest neoclassical economics disagree. Concepts of sustainability requires fair distribution of natural resources and neoclassical theory suggests including equity in to the consumer preference model; this model does not attend fully the concepts of sustainability as actors of those choice model may consider well-being of themselves or their children but not necessarily the private or social concerns of others and the fairer distribution of resources. In market people do not share their views instead they show the willingness to pay the price and their willingness to pay may not equate the benefit of environmental and social well-being as (it may) required by sustainability and therefore there is a possibility that market will fail and the model may suggest that whatever the market has suggested is sustainable and acceptable. During financial crisis China and India continued to score the GDP growth while other countries were repeatedly reporting lower or negative growth but the growth did not come clean instead it was accompanied by environmental degradation and increasing pollution in both the countries . Neoclassical economics with regard to sustainability; when applied generally concentrated on technological development but excludes institutional structures that plays critical role in managing resources, policy making and usage of scarce resources. Economists know the “price of everything and the value of nothing” and the direct proof of this is the exclusion of non-priced natural resources, environmental benefits and social values. While achieving optimal outcome through market interactions if the outcome is inefficient (market failure), it is considered that the process which drives the price has broken. Neoclassical economics sees GDP growth as an important indicator of performance of a country and estimates that with the increased GDP; production increases along with financial resources, more investment, more jobs and overall economy will flourish but how reliable it is in relation to the core concepts of sustainability. If neoclassical economics itself was to exists for completely devoted to economic growth there would not be any problem in using current structure but the economy is connected in many ways with multidimensional approach of sustainable development. Ethics in economics; Ethics basically means doing right thing and while using mainstream (neoclassical) economics theories and models to tackle core concepts of sustainability, it is very important to appreciate the ideology behind the thought of the sustainability.
Conclusion:
Since last few decades as a result of globalization our global economy has become large and constantly growing, we cannot expect it to continue at the same speed with the utilisation of same natural resources assuming that it is abundant and has no other effect if diminished. Humanity at large must come together and convert to sustainable economy. Neoclassical economics sees GDP growth as an important indicator of performance of a country and estimates that with the increased GDP; production increases along with financial resources, more investment, more jobs and overall economy will flourish but how reliable it is in relation to the core concepts of sustainability. If neoclassical economics itself was to exists for completely devoted to economic growth there would not be any problem in using current structure but the economy is connected in many ways with multidimensional approach of sustainable development. Ethics in economics; Ethics basically means doing right thing and while using mainstream (neoclassical) economics theories and models to tackle core concepts of sustainability, it is very important to appreciate the ideology behind the thought of the sustainability. Does economics agrees with this or not but there is a lot of work needs to be done. Peter Radford (2011), suggest that economics should abide the rule that is being followed by Medicine “do no harm” and calls for a time to “sort the mess out”

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