Steady-State?

Now, macroeconomics is not my expertise, so this one is really for the rest of you to handle. But it is in reference to some macroeconomic literature pertaining to ecological economics written by Herman E. Daly all the way back in a 2005 issue of Scientific American. Here are the quotes of interest...

But the facts are plain and uncontestable: the biosphere is finite, nongrowing, closed (except for the constant input of solar energy), and constrained by the laws of thermodynamics. Any subsystem, such as the economy, must at some point cease growing and adapt itself to a dynamic equilibrium, something like a steady state.

The article referenced John Stuart Mill's theories concerning a stationary state, and I'm hoping someone can enlighten me regarding those thoughts. A bit further is what I consider Daly's most quotable quote...

Because establishing and maintaining a sustainable economy entails an enormous change of mind and heart by economists, politicians and voters, one might well be tempted to declare such a project would be impossible. By the alternative to a sustainable economy, an ever growing economy, is biophysically impossible. In choosing between tackling a political impossibility and a biophysical impossibility, I would judge the latter the more impossible and take my chances with the former.

I think Daly may be setting up a false dichotomy, as his separation of growth and development makes his argument unnecessarily argumentative. Wealth as sought by economic growth should be achievable through economic development, since the throughput won't inevitably remain entropy-neutral. Still, this has it's own assumption: Can production add value to total capital without depleting natural resources?

Illustration Credited to Matt Collins from the article discussed.

Internalizing Costs

This is the first of what I expect to be many references to internalizing costs. Without going into too much detail on the process of representing environmental cost into prices, I would like to summarize why such internalization is necessary. Contemporary economics, as influenced be Adam Smith, David Riccardo, and so on, grew up in an earlier time, a better time. Man-made capital was the limiting resource, and the idea that natural capital would ever be scarce was absurd. Today most environmentalists (and several key economists) have realized that natural capital is finally the more scarce of the two rudimentary types of capital. However, the price system that governs a market economy barely incorporates "natural capital" unless that capital is harvested, mined, or otherwise arranged in a commodity form--and even then most of the cost is in the labor needed for the extraction. The costs of lost ecosystem services, pollution, or less tangible environmental damage is usually paid indirectly--and as in the case of most external costs, inadequately and irresponsibly--through government spending of tax dollars.

The libertarian in me asks, "Why not internalize the costs and allow market forces to inspire sufficient environmental responsibility?" Scientists have devoted their careers to estimate the value, in dollars, that a particular ecosystem is worth to society. The commonly cited "economic trivia", if you will, is that the biosphere provides twice the global economy in services such as water filtration, pollution management, and crop pollination (among thousands if not millions of others). So the value is there, but how do we internalize it?

So the question becomes a "How do we represent these costs in our prices?" And where I'm stuck is exactly how marginalization breaks down regarding an ecosystem service. Ecology would suggest that a certain amount of exploitation can be sustained before a threshold is reached, though ecologists argue that knowledge of that threshold is unattainable. The overall value of the ecosystem can be gaged, though I'm skeptical that approximating average total cost as the marginal cost would work with many key issues. For example, carbon emissions might contribute only a minor environmental cost early on but eventually reach infinite environmental cost (and for those non-math majors, the average cost is going to end up being "infinity over total units", or... infinity). How can this be resolved?