One focus of the work on joint ecological economic systems has been material and energy flows. A dominant theme in this body of work has been the grounding of conventional economic models in the biophysical realities of the economic process. This emphasis shifts the focus from exchange to the production of wealth itself. Cleveland traces the early roots of this work dating back to the physiocrats. The energy and environmental events of the 1960s and the 1970s pushed work in this area to new levels. Energy and material flow analysis in recent times is rooted in the work of a number of economists, ecologists, and physicists. Economists such as Boulding and Geogescu-Roegen demonstrated the environmental and economic implications of the mass and energy balance principle. Ecologists such as Lotka and H. T. Odum pointed out the importance of energy in the structure and evolutionary dynamics of ecological and economic systems. And physicists such as Prigogine worked out the far-from-equilibrium thermodynamics of living systems.
The principle of the conservation of mass and energy has formed the basis for a number of important contributions. The assumption was first made explicit in the context of a general equilibrium model by Ayres and Kneese and subsequently by Maler, but it also is a feature of the series of linear models developed after 1966. All reflect the assumption that a closed physical system must satisfy the conservation ofmass condition, and hence that economic growth necessarily increases both the extraction of environmental resources and the volume of waste deposited in the environment.
Perrings developed a variant of the Neumann-Leontief-Sraffa general equilibrium model in the context of a jointly determined economy-environment system subject to a conservation of mass constraint. The model demonstrates that the conservation ofmass contradicts the free disposal, free gifts, and noninnovation assumptions of such models. An expanding economy causes continuous disequilibrating change in the environment. Since market prices in an interdependent economy-environment system often do not accurately reflect environmental change, such transformations of the environment often will go unanticipated.
Ayres describes some ofthe important implications of the laws of thermodynamics for the production process, including the limits they place on the substitution of human capital for natural capital and the ability of technical change to offset the depletion or degradation of natural capital. Although they may be substitutes in individual processes in the short run, natural capital and human-made capital ultimately are complements, because both manufactured and human capital require materials and energy for their own production and maintenance. The interpretation of traditional production functions such as the Cobb-Douglas or Constant Elasticity of Substitution (CES) must be modified to avoid the erroneous conclusion that 'self-generating technological change' can maintain a constant output with ever-decreasing amounts of energy and materials as long as ever-increasing amounts of human capital are available.
Furthermore, there are irreducible thermodynamic minimum amounts of energy and materials required to produce a unit of output that technical change cannot alter. In sectors that are largely concerned with processing and/or fabricating materials, technical change is subject to diminishing returns as it approaches these thermodynamic minimums. Ruth uses equilibrium and nonequilibrium thermodynamics to describe the materials-energy-information relationship in the biosphere and in economic systems. In addition to illuminating the boundaries for material and energy conversions in economic systems, thermodynamic assessments of material and energy flows, particularly in the case of effluents, can provide information about depletion and degradation that are not reflected in market price.
There is also the effect of the time rate of thermo-dynamic processes on their efficiency, and, more importantly, their power or rate of doing useful work. H. T. Odum and Pinkerton pointed out that to achieve the thermodynamic minimum energy requirements for a process implied running the process infinitely slowly. This means at a rate of production of useful work (power) of zero. Both ecological and economic systems must do useful work in order to compete and survive, and H. T. Odum and Pinkerton showed that for maximum power production an efficiency significantly worse than the thermodynamic minimum was required.
These biophysical foundations have been incorporated into models of natural resource supply and of the relationship between energy use and economic performance. Cleveland and Kaufmann developed econometric models that explicitly represent and integrate the geologic, economic, and political forces that determine the supply of oil in the United States. Those models are superior in explaining the historical record than those from any single discipline. Larsson et al. also use energy and material flows to demonstrate the dependence of a renewable resource such as commercial shrimp farming on the services generated by marine and agricultural ecosystems.
One important advance generated by this work is the economic importance of energy quality, namely, that a kilocalorie of primary electricity can produce more output than a kilocalorie of oil, a kilocalorie of oil can produce more output than a kilocalorie of coal, and so on. H. T. Odum describes how energy use in ecological and economic hierarchies tends to increase the quality of energy, and that significant amounts of energy are dissipated to produce higher-quality forms that perform critical control and feedback functions which enhance the survival of the system. Cleveland et al. and Kaufmann show that much of the decline in the energy/ real GDP ratio in industrial nations is due to the shift from coal to petroleum and primary electricity. Their results show that autonomous energy-saving technical change has had little, if any, effect on the energy/real GDP ratio. Stern finds that accounting for fuel quality produces an unambiguous causal connection between energy use and economic growth in the United States, confirming the unique, critical role that energy plays in the production of wealth.
The analysis of energy flows has also been used to illuminate the structure of ecosystems. Hannon applied input-output analysis (originally developed to study interdependence in economies) to the analysis of energy flow in ecosystems. This approach quantifies the direct plus indirect energy that connects an ecosystem component to the remainder of the ecosystem. Hannon demonstrates this methodology using energy flow data from the classic study of the Silver Springs (Florida) food web. These approaches hold the possibility of treating ecological and economic systems in the same conceptual framework, one of the primary goals of ecological economics.
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