Governance and decision making

1
The Global Crisis and the credit crunch
Alicante January 2009
2

• Miriam Kennet
• What is Economics?
• What is an economist ?

3
What is economics?

• The original word for Economics was Oikonomia
  which meant household management
• In fact, true economics, Oikonomia, is about
  managing the needs of society,nature,non human
  species, the planet and the biosphere

4
What is economics?Scarcity

• Managing scarce resources-
• The more scarce a resource, the more value is
  created,Samuelson the father of Neo classical
  economics
• Current economics values scarcity-
• And so chopping down the rainforest creates
  scarcity and therefore value in the forest.
• In fact the opposite is actually true in the
  life-world we need abundant rainforests.

5

• Mainstream economics
• Preferences

Preference of homo economicus as expressed by his
spending activities.
6
Growth

• Mainstream models -
• Solow-Swan Growth Model
• as increased stocks of capital goods
• (means of production) showed the
• relationship between labor-time,
• capital goods, output, and investment.
• , the role of technological change became
  crucial,
• even more important than the
• accumulation of capital. 1950s,.

7
Growth theories

• Assumes that countries use their resources
  efficiently and that there are diminishing
  returns to capital and labor increases.
• A)increasing capital relative to labor creates
  economic growth, since people can be more
  productive given more capital.
• B) poor countries with less capital per person
  will grow faster because each investment in
  capital will produce a higher return than rich
  countries with ample capital.
• C) because of diminishing returns to capital,
  economies will eventually reach a point at which
  no new increase in capital will create economic
  growth. This point is called a "steady state.

8
Rostows stages of economic growth

• Walt Rostow 1916 0 2003 wrote Stages of economic
  growth a non communist manifesto. 1960 He saw
  his work as a political mission and he worked
  with Gunnar Mydal and believed in economic take
  off. He argued that development policy could be
  a political instrument in the east west conflict.
  He formed the Charles River Clique working on
  President Kennedys campaign. He believed that
  economic growth would stop communism.
• He distinguished 5 stages that countries have to
  pass through,
• a)      the traditional society
• b)      the preconditions for take off
• c)      the take off
• d)      the drive to maturity- (self sustained
  growth)?
• the age of high mass consumption

9
GDP 1
GDP is an indicator of total volume of goods and
services produced each year and the variations
therein. Growth is based on GDP - GDP is based
on a)Market value of all the goods and services
sold in a country per year measured in money
b)The cost of producing non market services
provided by government bodies , education,
central and local government services, etc
10
Origins of economics?

• Xenophon Oikonomikos 369 BCE Estate Management
  or household management and efficiency using
  administrative authority to interact with nature
  and agriculture

11
Origins of Economics?

• Aristotle
• 384 322 BCE
• Nichomachean Ethics
• 3 types of economics justice
• Oikonomia the management of the household,
• Wealth acquisition through exchange which should
  be limited and not at someon else's expense
• The good life or eudaemonia
• Happiness through virtuous activities.

12
History of economics

• What is an economist?
• Is it this or ?

13
History of economics

• Or this ?

• Who contributes the most?

14
David Ricardo 1772-1823 Ricardo's most famous
work is his Principles of Political Economy and
Taxation. Ricardo opens the first chapter with a
statement of the labour theory of value. Later in
this chapter, he demonstrates that prices do not
correspond to this value. He retained the theory,
however, as an approximation. Ricardo continued
to work on his value theory to the end of his
life. This book introduces the theory of
comparative advantage. According to Ricardo's
theory, even if a country could produce
everything more efficiently than another country,
it would reap gains from specializing in what it
was best at producing and trading with other
nations. (Case Fair, 1999 812818). Ricardo
believed that wages should be left to free
competition, so there should be no restrictions
on the importation of agricultural products from
abroad. The benefits of comparative advantage
are both distributional and related to improved
real income. Within Ricardo's theory
distributional effects included that foreign
trade could not directly affect profits because
profits respond only in changes to the level of
wages. The effects on income are always
beneficial because foreign trade does not affect
value. Comparative advantage forms the basis of
modern trade theory, reformulated as the
Heckscher-Ohlin theorem, which states that a
country has a comparative advantage in the
production of a product if the country is
relatively well-endowed with inputs that are used
intensively in producing the product. (Case
Fair, 1999 822). Like Adam Smith, Ricardo was
also an opponent of protectionism for national
economies, especially for agriculture.
15
Scottish Enlightenment

• Adam Smith the father of modern economics
• An enquiry into the causes of the wealth of
  nations 1776
• We could change from savages in the countryside
  to the market of laissez faire

16
John Stuart Mill

• (20 May 1806 8 May 1873), British philosopher,
  political economist, civil servant and Member of
  Parliament, was an influential liberal thinker of
  the 19th century. He was a teacher of
  utilitarianism, an ethical theory developed by
  his godfather, different from Bentham's
• Steady State economy.

17
Jeremy Bentham

• advocacy of utilitarianism and his opposition to
  the concept of natural rights1, with oft quoted
  statements to the effect that such rights were
  nonsense2. He influenced the development of
  welfarism3, a concept espoused by modern
  American liberals.
• Bentham was one of the most influential
  utilitarians, partially through his writings but
  particularly through his students all around the
  world. These included his secretary and
  collaborator on the utilitarian school of
  philosophy James Mill, James Mill's son John
  Stuart Mill, and several political leaders (and
  Robert Owen, who later became a founder of
  socialism).

18
Alfred Marshall
Alfred Marshall's textbook, Principles of
Economics (1890), was the dominant textbook in
England a generation later. Marshall's influence
extended elsewhere Italians would compliment
Maffeo Pantaleoni by calling him the "Marshall of
Italy". Marshall thought classical economics
attempted to explain prices by the cost of
production. He asserted that the Neo- cassicals
went too far in correcting this imbalance by over
emphasizing utility and demand. Marshall thought
the question of whether supply or demand was more
important was analogous to the pointless question
of which blade of a scissors did the
cutting. Marshall explained prices by the
intersection of supply and demand curves. The
introduction of different market "periods" was an
important innovation of Marshall's Market
period. The goods produced for sale on the market
are taken as given data, e.g. in a fish market.
Prices quickly adjust to clear markets.
Short period. Industrial capacity is taken as
given. The level of output, the level of
employment, the inputs of raw materials, and
prices fluctuate to equate marginal cost and
marginal revenue, where profits are maximized.
Economic rents exist in short period equilibrium
for fixed factors, and the rate of profit is not
equated across sectors. Long period. The
stock of capital goods, such as factories and
machines, is not taken as given.
Profit-maximizing equilibria determine both
industrial capacity and the level at which it is
operated. Very long period. Technology,
population trends, habits and customs are not
taken as given, but allowed to vary in very long
period models. Marshall took supply and demand
as stable functions and extended supply and
demand explanations of prices to all runs. He
argued supply was easier to vary in longer runs,
and thus became a more important determinate of
price in the very long run.
19
Neo classical economics
1. People have rational preferences among
outcomes that can be identified and associated
with a value. 2. Individuals maximize utility
and firms maximize profits. 3. People act
independently on the basis of full and relevant
information. From these three assumptions,
neoclassical economists have built a structure to
understand the allocation of scarce resources
among alternative ends -- in fact understanding
such allocation is often considered the
definition of economics to neoclassical
theorists. Here's how William Stanley Jevons
presented "the problem of Economics".
"Given, a certain population, with various needs
and powers of production, in possession of
certain lands and other sources of material
required, the mode of employing their labour
which will maximize the utility of their produce."
20
Neo Classical Economics profit maximization lies
behind the neoclassical theory of the firm,
demand curves leads to an understanding of
consumer goods, supply curve allows an
analysis of the factors of production. Utility
maximization for consumption, of demand curves
for consumer goods, Market supply and demand are
aggregated across firms and individuals. Their
interactions determine equilibrium output and
price. The market supply and demand for each
factor of production is derived analogously to
those for market final output to determine
equilibrium income and the income distribution.
Neoclassical economics emphasizes equilibria,
where equilibria are the solutions of agent
maximization problems. Eeconomic phenomena can
be explained by aggregating over the behavior of
agents. The emphasis is on microeconomics.
Institutions, which might be considered as prior
to and conditioning individual behavior, are
de-emphasized.
21
Keynes

• 1936 t the General Theory of Employment, Interest
  and Money,
• t "the theory of aggregated production, which is
  the point of the following book, nevertheless can
  be much easier adapted to the conditions of a
  totalitarian state eines totalen Staates than
  the theory of production and distribution of a
  given production put forth under conditions of
  free competition and a large degree of
  laissez-faire."
• aggregate demand to explain variations in the
  overall level of economic activity, such as were
  observed in the Great Depression.
• The total income in a society is defined by the
  sum of consumption and investment and in a state
  of unemployment and unused production capacity,
  one can only enhance employment and total income
  by first increasing expenditures for either
  consumption or investment.

22
Keynes contribution
The General Theory of Employment, Interest, and
Money (1936), Keynes laid the foundation for the
branch of economics termed "Macroeonomics" today.
Based on the methods devised by Alfred Marshall,
he argued that macroeconomic relationships differ
from their microeconomic counterparts because the
ceteris paribus clauses applicable to different
levels of aggregation differ. The view of given
prices and wages income determines demand (see
IS-LM), pre-dates Keynes. His innovation is to
take, in his core argument, prices and wages as
perfectly flexible and establish that the
interaction of "aggregate demand" (in his sense)
and "aggregate supply" (in his sense) may lead to
stable unemployment equilibria. His work on
employment went against the idea that the market
ultimately settles at a state of full employment
- a central tenet of Classical economists.
Instead he argued that there exists a continuum
of equilibria, the full employment equilibrium
position being just one of them.
23
Keynes

• Prevailing economic orthodoxy stuck to the old
• classical view that Markets will clear in the
  long
• run.
• At the height of the crisis, the fledgling
• Labour government was told by Treasury
• officials that the government must balance the
• budget to survive the depression.
• This
• effectively meant increasing taxes and cutting
• unemployment benefits. Keynes described this
• as economic madness and argued for the exact
• opposite.
• He argued in a recession of this
• magnitude, it was necessary for the government
• to intervene and actively stimulate the
• economy. Apart from a few half hearted
• attempts such as the new deal, Keynes' policies
• were largely ignored in the UK and US and
• high levels of unemployment persisted until the

24
Paul SamuelsonNeo classical economics
Samuelson is considered one of the founders of
modern neoclassical economics.
International economics, where he influenced the
development of two important international trade
models the Balassa-Samuelson effect, and the
Heckscher-Ohlin model (with the Stolper-Samuelson
theorem).
Consumer theory, he pioneered the Revealed
Preference Theory, which is a method by which it
is possible to discern the best possible option,
and thus define consumer's utility functions, by
observing the consumer behaviour.
25
Critique of Samuelson
Samuelson admits that utility is a construct
that has no basis in psychology although he uses
the terms consumer and individual, his model
is built around a fictional character that
critics have dubbed Homo economicus. This
economic man (yes, he is male) never had a
childhood, never has children, has never depended
upon a caregiver and does not have anyone he
provides care for. He only experiences well-being
by consuming. He is rational, selfish, a
psychopath... he isnt influenced by hundreds of
billions of dollars in advertising or the
purchases of his neighbors. If Homo economicus
buys something, it gives him utility his
consumer sovereignty must be respected.
26
Rosa Luxemburg

• Polish and moved to Germany
• Marxist
• Wrote a critique of capitalism
• The Accumulation of Capital
• Was killed
• Idea was that capitalism depended on non
  capitalist production areas with lower wages and
  that the poor had to be driven off rural land- so
  that they could become the labour power and their
  land given to elites who would also service
  capitalism for the ruling imperial power- eg in
  India and China.
• Background opium war and Indian peasantry
  observations

27
Joan Robinson a Marxist Only significant
woman to get acknowledgement in mainstream
Robinson assisted with the support and
exposition of Keynes' General Theory, writing
especially on its employment implications in 1936
and 1937 (in the midst of the Great Depression it
tried to explain). In 1933, in her book, The
Economics of Imperfect Competition, Robinson
coined the term, "Monopsony," which is used to
describe the buyer converse of a seller
monopoly. In 1942 Robinson's An Essay on Marxian
Economics famously concentrated on Karl Marx as
an economist, helping revive the debate on this
aspect of his legacy. During the Second World
War, Joan Robinson worked on a few different
Committees for the wartime national government.
During this time, she visited the Soviet Union as
well as China. She developed an interest in
underdeveloped and developing nations and
contributed a lot that is now understood in this
section of economics. In 1949, she was invited
by Ragnar Frisch to become the vice president of
the Econometric Society but declined because she
couldn't be part of the editorial committee on a
journal she couldn't read. In 1956, Joan
Robinson published her magnum opus, The
Accumulation of Capital, which extended
Keynesianism into the long-run. Six years later,
she published another book about growth theory,
which talked about concepts of "Golden Age"
growth paths. Afterwards, she developed the
Cambridge growth theory with Nicholas
Kaldor. Close to the end of her life she studied
and concentrated on methodological problems in
economics and tried to recover the original
message of Keynes' General Theory. Between 1962
and 1980 she wrote many books to try and bring
several economic theories to the general public.
Robinson suggested developing an alternative to
the revival of classical economics
28
Kenneth Arrow

• He is considered one of the founders of modern
  (post World War II) neo-classical economics.
• His most significant works are his contributions
  to social choice theory, notably "Arrow's
  impossibility theorem", and his work on general
  equilibrium analysis. He has also provided
  foundational work in many other areas of
  economics, including endogenous growth theory and
  the economics of information.

29
Social choice theory

• Bentham Persons maximize their choice for
  utility for themselves
• Aggregated the utility is good for everyone.
• Criticism
• However, if a rich person gets less utility from
  food for example -then they might not do whats
  best for fair distribution of food.
• Arrow and Sen
• Proved that not everyone has the same background
  or requirements so this doesnt work

30
Paul Krugman 1953

• Economies and returns from scale
• And New Economics Geography
• Geographical concentration of population and
  activity
• Consumption influenced by many others
• Economies of scale
• Where does activity take place
• Why do countries near the Equator tend to be
  poorer
• Fewer firms less competition more profits
• Hecksher Olin Theory,markets are perfectly
  competitiive, trading nations identical, tastes
  identical,economies all fully employed- constant
  economies of scale prevail in production, firms
  increase all output by a proportion output
  increases by that proportion
• Krugman found therefore that -if firms increase
  all inputs by the economies of scale then ,
  output increases by economies of scale. This will
  lead to fewer and larger firms and competition
  becomes imperfect within that industry
• Critical of Bush Administration

31
It looks as if the economy is falling off a cliff

• Depression economics
• When you have depression economics the usual
  rules dont apply and virtue becomes vice and
• Caution is risky
• Prudence is folly

32
Simon Kuznet

• National Income and Its Composition, 19191938.
  Published in 1941, it contains a historically
  significant work on Gross National Product. His
  work on the business cycle and disequilibrium
  aspects of economic growth helped launch
  development economics. He also studied inequality
  over time, and his results formed the Kuznets
  Curve.
• Another important development was Kuznets'
  empirical examination of Keynes' 1936 Absolute
  Income Hypothesis. The hypothesis gave birth to
  what would become the first formal consumption
  function.underdeveloped countries of today
  possess characteristics different from those that
  industrialized countries faced before they
  developed, helped put an end to the simplistic
  view that all countries went through the same
  "linear stages" in their history and launched the
  separate field of development economics -

33
Kuznet curve

• U shaped relationship between income inequality
  and economic growth
• During economic development growth measured by
  GDP will be unequal at first will stabilize
  gradually and then become equal. Therefore
  inequality had to rise first before being solved.
• This meant at first need to support those on very
  low incomes
• Then shift to those on middle incomes savings
  improved , industraliisation of agriculture and
  towards manufacturing, causing initially a
  relative inequality,
• Decrese in population of upper income,
  inheritance taxes,
• Developing countries should only focus on growth,
  not be concerned with income distribution
• For more info on Environmental Kuznet Curve
  See Lawn P. in International Journal of Green
  Economics, and some work by Ekins.P.

34
Robert CostanzaEcological Economics
Dr. Costanza's research has focused on the
interface between ecological and economic
systems, particularly at larger temporal and
spatial scales. This includes landscape level
spatial simulation modeling analysis of energy
and material flows through economic and
ecological systems valuation of ecosystem
services, biodiversity, and natural capital and
analysis of dysfunctional incentive systems and
ways to correct them.
35
Kenneth Boulding The coming of spaceship earth
Complex system. It is easy to have too simple a
view of it, and it is easy to do harm and to make
things worse under the impulse to do good and
make things better. "Anything that exists is
possible." "Theories without facts may be barren,
but facts without theories are meaningless."
"Anyone who believes exponential growth can go on
forever in a finite world is either a madman or
an economist." "Mathematics brought rigor to
Economics. Unfortunately, it also brought
mortis." "Economists are like computers. They
need to have facts punched into them." "We make
our tools, and then they shape us." "Nothing
fails like success because we don't learn from
it. We learn only from failure." "There is no
such thing as economics, only social science
applied to economic problems."
36
Georgescu Roegen

• Father of ecological or bio economics
• 1906
• Entropy law
• Thermodynamics
• 1971 The Entropy Law and The Economic Process
• The economic process is entropic it neither
  creates nor consumes matter or energy, but only
  transforms low into high entropy(That is
  irrevocable waste).1966
• Demand side moderates consumption and avoiding
  waste
• Humans should see themselves as an evolving
  organism and protect future generations

37
Herman Daly

• Daly's books include Towards a Steady-State
  Economy (1973) Steady-State Economics (1977)
  Economics, Ecology, Ethics (1980) Valuing the
  Earth Economics, Ecology, Ethics (co-edited with
  K. Townsend) For the Common Good Redirecting
  the Economy Toward Community, the Environment and
  a Sustainable Future (with John Cobb, 1989)
  Population, Technology and Lifestyle (co-edited
  with R. Goodland and S. El Serafy, 1992) Beyond
  Growth The Economics of Sustainable Development
  (1996). He has also published over 100 articles
  in scholarly journals and magazines.
• In 1989, Daly was one of the key figures in the
  foundation of the International Society for
  Ecological Economics (ISEE), and serves as
  Associate Editor of its journal Ecological
  Economics. ISEE is the major forum that links
  economists and ecologists, and academics and
  environmental activists.

38
Amartya Sen

• Sen's seminal papers in the late sixties and
  early seventies helped develop the theory of
  social choice, which first came to prominence in
  the work by the American economist Kenneth Arrow,
• who, while working in the fifties at the RAND
• Corporation, famously proved that all voting
  rules,
• be they majority voting or two thirds-majority or
  status quo
• , must inevitably conflict with some basic
  democratic norm.
• Sen's contribution to the literature
• as to show under what conditions Arrow's
  Impossibility
• Theorem would indeed come to pass as well as to
  extend and
• enrich the theory of social choice, informed by
  his
• interests in history of
• economic thought and philosophy.
• In 1981, Sen published Poverty and Famines
• An Essay on Entitlement and Deprivation,
• a book in which he demonstrated that famie
• e occurs not only from a lack of food,
• but from inequalities built into mechanisms for
  distributing food. Sen's interest in famine
  stemmed from personal experience. As a
  nine-year-old boy, he witnessed the Bengal famine
  of 1943, in which three million people perished.
  This staggering loss of life was unnecessary

39
Capabilities approach
he Capability Approach is a conceptual framework
developed by Amartya Sen and Martha Nussbaum for
evaluating social states in terms of human
well-being (welfare). It emphasizes functional
capabilities ("substantial freedoms", such as the
ability to live to old age, engage in economic
transactions, or participate in political
activities) these are construed in terms of the
substantive freedoms people have reason to value,
instead of utility (happiness, desire-fulfilment
or choice) or access to resources (income,
commodities, assets). Poverty is understood as
capability-deprivation. It is noteworthy that
the emphasis is not only on how human beings
actually function but on their having the
capability, which is a practical choice, to
function in important ways if they so wish.
Someone could be deprived of such capabilities in
many ways, e.g. by ignorance, government
oppression, lack of financial resources, or false
consciousness. ?
40
Sen and Choice theories
This approach to human well-being emphasises the
importance of freedom of choice, individual
heterogeneity and the multi-dimensional nature of
welfare. In significant respects, the approach is
consistent with the handling of choice within
conventional micro-economics consumer theory
although its conceptual foundations enable it to
acknowledge the existence of claims, like rights,
which lexicographically dominate utility based
claims (see Sen (1979))?
41
Ten Capabilities influences 1-4 HDI Human
Development Index
1. Life. Being able to live to the end of a
human life of normal length not dying
prematurely, or before one's life is so reduced
as to be not worth living. 2. Bodily Health.
Being able to have good health, including
reproductive health to be adequately nourished
to have adequate shelter. 3. Bodily Integrity.
Being able to move freely from place to place
to be secure against violent assault, including
sexual assault and domestic violence having
opportunities for sexual satisfaction and for
choice in matters of reproduction. 4. Senses,
Imagination, and Thought Being able to use the
senses, to imagine, think, and reason-- and to do
these things in a "truly human" way, a way
informed and cultivated by an adequate education,
including, but by no means limited to, literacy
and basic mathematical and scientific training.
Being able to use imagination and thought in
connection with experiencing and producing works
and events of one's own choice, religious,
literary, musical, and so forth. Being able to
use one's mind in ways protected by guarantees of
freedom of expression/ political and artistic
speech, and freedom of religious exercise. Being
able to have pleasurable experiences and to avoid
non-beneficial pain.
42
Ten capabilities 5-10
5. Emotions. Being able to have attachments to
things and people outside ourselves to love
those who love and care for us, to grieve at
their absence in general, to love, to grieve, to
experience longing, gratitude, and justified
anger. Not having one's emotional development
blighted by fear and anxiety. (Supporting this
capability means supporting forms of human
association that can be shown to be crucial in
their development.)? 6. Practical Reason
Being able to form a conception of the good and
to engage in critical reflection about the
planning of one's life. (This entails protection
for the liberty of conscience and religious
observance.)? 7. Affiliation. 1.
Being able to live with and toward others, to
recognize and show concern for other human
beings, to engage in various forms of social
interaction to be able to imagine the situation
of another. (Protecting this capability means
protecting institutions that constitute and
nourish such forms of affiliation, and also
protecting the freedom of assembly and political
speech.)? 2. Having the social bases of
self-respect and non-humiliation being able to
be treated as a dignified being whose worth is
equal to that of others. This entails provisions
of non-discrimination on the basis of race, sex,
sexual orientation, ethnicity, caste, religion,
national origin. 8. Other Species. Being able
to live with concern for and in relation to
animals, plants, and the world of nature. 9.
Play. Being able to laugh, to play, to enjoy
recreational activities. 10. Control over one's
Environment. 1. Political. Being able to
participated effectively in political choices
that govern one's life having the right of
political participation, protections of free
speech and association. 2. Material.
Being able to hold property (both land and
movable goods), and having property rights on an
equal basis with others having the right to seek
employment on an equal basis with others having
the freedom from unwarranted search and seizure.
In work, being able to work as a human being,
exercising practical reason and entering into
meaningful relationships of mutual recognition
with other workers.
43
Sens arguments

• Sen argues that neo classical economists have
  preference theory backwards
• People dont adapt their preferences to maximize
  utility, eg they dont NOT learn to read out of
  choice but rather they lack the capability- due
  to lack of resources.
• Learning to read make them more capable
• He also distinguishes between economic growth and
  economic development
• Book- Development as Freedom

44
Marilyn Waring
Marilyn Waring (born 1952) is a New Zealand
feminist, an activist for "female human rights",
an author and an academic. She holds a Ph.D. in
political economy
She has outspokenly criticised the concept of
GDP, the economic measure that became a
foundation of the United Nations System of
National Accounts (UNSNA) following World War II.
She ridicules a system which 'counts oil spills
and wars as contributors to economic growth,
while child-rearing and housekeeping are deemed
valueless'.
45
Issues to consider

• Normative issues such as intergenerational
  fairness come into discussions- and distributive
  issues between rich and poor nations are
  important
• Uncertainties can take several forms such as
  price,irreversible environmental damage
• Unexpected or sudden species extinction

• Limits to environmental resource are imposed by
  nature
• Origin, interactions and reproductive capacity
  are governed by nature
• Most of these resources have no readily available
  markets

46
Hussen's environmental economics issues 1

• Causes of environmental degradation,
• Need to establish disciplinary ties between
  ecology and economics
• Ownerships rights are difficult to establish for
  the environment
• Trade off between environmental degradation and
  economics goods and services
• Ineffectiveness of the market in allocating
  environmental resources
• Assessing monetary value of environmental damage
• Public policy instruments that can be used to
  slow halt and reverse the deterioration of
  environmental resources, and overexploitation of
  resources which might be non renewable

47
Hussen's environmental economics issues 2

• Macroeconomics effects of environmental
  regulation and other resource conservation
  policies
• Technology and the extent to which it can be used
  to ameliorate the environmental degradation or
  resource scarcity
• Environmental problems that transcend national
  boundaries
• Limits to economic growth
• The extent to which past experience can be used
  to predict future events of ecological and
  economics and technological uncertainty
• Ethical and moral imperatives for environmental
  resource conservation
• Concern for the welfare of future generations
• The interrelationships among poverty, population
  and environmental degradation
• In developing countries
• The necessity and viability of sustainable
  development

48
Neo classical economics 1

• In the neo classical world view
• The human economy is composed of people, flows of
  comodities and human institutions
• The most important flow is the generation of
  utility- satisfaction for humans
• Resources are fungible -that is one kind of
  resource can substitute for another
• Environmental resources have no intrinsic value
  and exist only to provide utility for humans and
  the economy
• In this worldview freedom of choice and private
  ownership are important
• In a centrally planned economy the production
  and distribution of goods are dictated by
  bureaucratic choices with resource ownership
  retained by the state
• Market economy- is composed of economic
  entities,households or firms
• scarcity

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Neo classical economics 2

• Commodities, markets, non market public and
  private institutions, with private ownership
  enforced and competition
• Product markets is where goods and services are
  exchanged
• The factor markets is where there is buying and
  selling of basic resources such as labour capital
  and natural resources
• Higher prices are a feature of emerging scarcity
  therefore desirable
• Opportunity cost costs not realised of the
  next best option e.g. If I choose to conserve an
  expensive tiger rather than a slightly more
  common species, then thats an opportunity cost,
• The market is an provider of information on
  resource scarcity

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Ideas of Neo Classical EconomicsThe perfect
market structure and the Invisible Hand

• Adam Smith
• Individuals working in their self interest will
  promote the welfare of the whole of society-
• The effectiveness of an economy is judged by how
  well it satisfies the material needs of its
  citizens- the consumers
• Maximum output from resources is aim- efficiency
  of exploitation is good,
• Requirements
• 1, freedom of choice based on self interest
• 2, competition
• 3,.perfect information
• 4 mobility of resources
• 5. Ownership rights
• Perfectly competitive markets,
• Adam Smith Father of modern economics the
  Invisible Hand will guide each individual to do
  not only what is in his self interest but also
  that of society at large

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• Adam Smith in The Wealth of Nations
• people in any society will not employ their
  capital in foreign trading only if the profits
  available by that method far exceed those
  available locally, and that in that case it is
  better for society as a whole that he does so.
• But the annual revenue of every society is
  always precisely equal to the exchangeable value
  of the whole annual produce of its industry, or
  rather is precisely the same thing with that
  exchangeable value.
• As every individual, therefore, endeavors as much
  as he can both to employ his capital in the
  support of domestic industry, so to direct that
  industry that its produce may be of the greatest
  value every individual necessarily labors to
  render the annual revenue of the society as great
  as he can. He generally, indeed, neither intends
  to promote the public interest, nor knows how
  much he is promoting it.
• By preferring the support of domestic to that of
  foreign industry, he intends only his own
  security and by directing that industry in such
  a manner as its produce may be of the greatest
  value, he intends only his own gain, and he is in
  this, as in many other cases, led by an invisible
  hand to promote an end which was no part of his
  intention. Nor is it always the worse for the
  society that it was not part of it.
• By pursuing his own interest he frequently
  promotes that of the society more effectually
  than when he really intends to promote it. I have
  never known much good done by those who affected
  to trade for the public good. It is an
  affectation, indeed, not very common among
  merchants, and very few words need be employed in
  dissuading them from it.
• (IV.ii.6-9, page 456 of the 1776 Glasgow Edition
  of Smiths works vol. IV, ch. 2, p. 477 of 1776
  U. of Chicago Edition.)?

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Pigou the father of welfare economics
The Economics of Welfare 1920), brought welfare
economics into the scope of economic analysis.
He showed that the market did not include some
costs, externalities, spill over effects and
third party effects.The market is therefore
inefficient in this respect which justifies
government intervention. There is a distinction
between private and social marginal products and
costs. Free Rider Effect I maximize my benefit
and let others pay. He originated the idea that
governments can, via a mixture of taxes and
subsidies, correct such perceived market failures
or "internalize the externalities". Pigovian
taxes, taxes used to correct negative
externalities, are named in his honor.
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Pigou -The father of environmental economics

• Suggested
• Society should compensate farmers whose crops
  were ruined by railways
• Economists should judge when the state should
  intervene
• Taxing rich people to pay for social costs-
  progressive taxation
• Eg Bill Gates wont notice a small tax.
• Sacrificing a little output was worth the gain.

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Ronald Coase
Public Choice theorists rejected Pigou's
approach for its naive "benevolent despot"
assumption. Ronald Coase demonstrated that
efficient outcomes could be generated without
government intervention when property rights are
clearly defined. "The Problem of Social Cost"
(1960 )? is considered an example of market
failure driving can impose hidden costs on other
drivers and society, whereas use of public
transportation or other ways of avoiding driving
would be more beneficial to society as a
whole. Other common examples of market failure
include environmental problems such as pollution
or overexploitation of natural resources.
Nevertheless, some economists see these as
symptoms of public property rather than free
markets.
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Coase Theorum
Describes the economic efficiency of an economic
allocation or outcome in the presence of
externalities. The theorem states that when
trade in an externality is possible and there are
no transaction costs, bargaining will lead to an
efficient outcome regardless of the initial
allocation of property rights. In practice,
obstacles to bargaining or poorly defined
property rights can prevent Coasian
bargaining. Describes the condition where the
allocation of goods and services by a market is
not efficient. Market failure can be viewed as a
scenario in which individuals' pursuit of
self-interest leads to bad results for society as
a whole
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Coase Theorum

• Private agents base their decisions on private
  costs as opposed to social costs because they
  dont have to support the social costs of their
  activities.Why dont they have to pay?
• Because there is no clear property right.
• Simple solution to the problem of externalities
  is to privatise property rights.
• But to whom should that property be allocated?
  Those creating the costs, polluters?or those
  experiencing the costs or reduction in
  welfare?Coase thinks both work.

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Causes of the down turn

• Spain debt to
• house price
• problems

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To solve this downturn

• We need to rethink our economics
• We need to consider all the players and provides
• We need to think of all the beneficiaries
• We need to provision for all of our needs

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Green solutions

• Detailed regulation of banks and financial
  markets
• Partly nationalised
• Strenghtening demand for public investment
• Sensible public projects -green ones
• Conversion to green technology
• Green jobs
• Sort out property market to end boom and bust
  no scarcity and good supply
• Second house ownership tax disadvantages
  changes to tax system for needs rather than
  investment
• Production factor labour not taxed but use of
  capital taxed and consumption of non green
  items
• Short term stimulate economy

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Longer term

• Longer term - not dependent on growth
• Working reduction
• Include women in GDP
• Who things are produced
• What is produced- social culture
• Not capitalised cheap goods- change in strucure
  of the economy towards more sensible use

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Green

• Move to greener climate
• Move to greener transport
• Move to greener
• Power
• Move to greener jobs
• Move to be more inclusive
• Restructure our economy