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Why we need to rethink economics to include nature

Why we need to rethink economics to include nature

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Nature is the foundation of all life – and economic activity. We need to build an economy that works for people and the planet.

Nature is the foundation of all life – and economic activity. We need to build an economy that works for people and the planet.

Why we need to rethink economics to include nature
Economics and sustainability are fundamentally intertwined. Yet, many economists don't see nature as an integral part of the economy. More often than not, economic analyses completely ignore the contributions made by nature. To build a sustainable future it’s time to rethink the way we look at economics.

Economics 101

If you haven’t studied economics at school, you might be surprised by how abstract the field is. Most models of the economy largely ignore the role of nature. Why? Because making accurate models is really complicated, so there are good reasons to simplify them. However, when nature is consistently left out, this becomes a huge problem. Decision makers in both business and government base their thinking on those simplified models, i.e. the ones that ignore the environment. Let’s look at how.

The economy is a system of consumption and production. Products and services are produced by machines which we refer to as capital, and people who provide labour. In economic models, it’s common to assume that you only have two inputs, labour and capital. What’s missing here? Nature! All economic processes use natural resources, like water.

Every economic process is dependent on natural resources and well-functioning ecosystems. When people and machines come together to produce things, it always involves using a natural resource. Whether we want to produce an item, like a laptop, or provide a service, like a haircut, it will always be with the input of natural resources. In order to produce the laptop we need a bunch of metals, like cobalt to make the battery. The hairdresser is producing a service with the use of scissors (capital), but also with the input of fresh water. On a more general level you could say that all interactions rely on nature, because humans need clean air to breathe —  and we can’t get that without well-functioning ecosystems.

Not all economics

Of course, there are economic models out there that include nature, but most mainstream models leave it out. There are certain models that look specifically at natural resources like a forest, or a fish stock, but these tend to focus on one area at a time. Unfortunately for the environment, models that look at the whole economy at a macro level — i.e. the more useful ones —  generally don’t include the use of natural resources. This is one of the reasons why they tend to underestimate the effects of climate changes on the future wellbeing of people and the economy.

Planetary boundaries

Although awareness about sustainability has grown over the last couple of decades, the economic models that are currently being used for analyses and taught in universities have not developed accordingly. Especially since we now know that there are limited resources that can be extracted from nature to be used in the future. The planetary boundaries framework was first proposed in 2009. It has become one of the dominant ways of conceptualizing our overconsumption of natural resources, and the pressure we put on natural ecosystems.

Building on insights from natural science, the framework defines nine critical limits for the global ecosystem. This means, each of the nine areas are considered to be critical to the stability and functioning of the overall earth system. These include: biodiversity loss, climate changes, the nitrogen and phosphorus cycles, ozone depletion, land use change, freshwater use, ocean acidification, particle pollution of the atmosphere and novel entities. You don’t need to know what all of those things mean, we can use biodiversity as an example.

As you can see, the boundary for biodiversity loss has already been transgressed, and we are rapidly progressing into the red area - which could lead us to ecosystem tipping points.

For a more detailed breakdown of the above chart click here.

What does this have to do with economics?

Leaving nature out of economic analysis makes it seem like nature is an infinite resource that never ends, or is free for everyone — be it government, businesses or people. The other side of this is that protecting nature looks like a huge cost. For example, imagine you’re building a road or railway through an area. Then you find out that this space is the special habitat of a unique and red-listed bird, and that we can protect this species if we build around its home. This detour will make the project more expensive in terms of money, but is important to protect biological diversity. This practice makes us ignore nature again and again, slowing down our necessary transformation to a more sustainable society. The result in the massive biodiversity loss we have today, as seen in the planetary boundaries. We’re currently destroying nature at a massive scale, in the name of economic growth. But this will surely come back to bite us!

Thankfully – new fields of economics are coming up at a fast pace

We need to rethink economics to better capture and understand what’s at stake when we ignore nature in our models. Fortunately there are advances being made in this field when it comes to thinking about sustainability and economics. In the coming months we will publish articles about the new ideas that are worth knowing about:

Doughnut economics provide a new framework for thinking about social and ecological, and social sustainability, in one. Remember the name Kate Raworth, she is the famous economist behind the model.

Circular economy – the famous buzzword, circular economics is a new way of structuring production and consumption, and how we think about resources and waste.

The UN’s Sustainable Development Goals that guide economic development to ensure social sustainability.

You could say that economics and sustainability is in a love-hate relationship. Even though the economy led us where we are today – at the brink of ecological collapse – it also holds the key to the solution. If we want to build a sustainable future, we need to get the economics right – and get the economists on board. Only then can we truly make decisions that are good for both people and the planet. Stay tuned!

Economics and sustainability are fundamentally intertwined. Yet, many economists don't see nature as an integral part of the economy. More often than not, economic analyses completely ignore the contributions made by nature. To build a sustainable future it’s time to rethink the way we look at economics.

Economics 101

If you haven’t studied economics at school, you might be surprised by how abstract the field is. Most models of the economy largely ignore the role of nature. Why? Because making accurate models is really complicated, so there are good reasons to simplify them. However, when nature is consistently left out, this becomes a huge problem. Decision makers in both business and government base their thinking on those simplified models, i.e. the ones that ignore the environment. Let’s look at how.

The economy is a system of consumption and production. Products and services are produced by machines which we refer to as capital, and people who provide labour. In economic models, it’s common to assume that you only have two inputs, labour and capital. What’s missing here? Nature! All economic processes use natural resources, like water.

Every economic process is dependent on natural resources and well-functioning ecosystems. When people and machines come together to produce things, it always involves using a natural resource. Whether we want to produce an item, like a laptop, or provide a service, like a haircut, it will always be with the input of natural resources. In order to produce the laptop we need a bunch of metals, like cobalt to make the battery. The hairdresser is producing a service with the use of scissors (capital), but also with the input of fresh water. On a more general level you could say that all interactions rely on nature, because humans need clean air to breathe —  and we can’t get that without well-functioning ecosystems.

Not all economics

Of course, there are economic models out there that include nature, but most mainstream models leave it out. There are certain models that look specifically at natural resources like a forest, or a fish stock, but these tend to focus on one area at a time. Unfortunately for the environment, models that look at the whole economy at a macro level — i.e. the more useful ones —  generally don’t include the use of natural resources. This is one of the reasons why they tend to underestimate the effects of climate changes on the future wellbeing of people and the economy.

Planetary boundaries

Although awareness about sustainability has grown over the last couple of decades, the economic models that are currently being used for analyses and taught in universities have not developed accordingly. Especially since we now know that there are limited resources that can be extracted from nature to be used in the future. The planetary boundaries framework was first proposed in 2009. It has become one of the dominant ways of conceptualizing our overconsumption of natural resources, and the pressure we put on natural ecosystems.

Building on insights from natural science, the framework defines nine critical limits for the global ecosystem. This means, each of the nine areas are considered to be critical to the stability and functioning of the overall earth system. These include: biodiversity loss, climate changes, the nitrogen and phosphorus cycles, ozone depletion, land use change, freshwater use, ocean acidification, particle pollution of the atmosphere and novel entities. You don’t need to know what all of those things mean, we can use biodiversity as an example.

As you can see, the boundary for biodiversity loss has already been transgressed, and we are rapidly progressing into the red area - which could lead us to ecosystem tipping points.

For a more detailed breakdown of the above chart click here.

What does this have to do with economics?

Leaving nature out of economic analysis makes it seem like nature is an infinite resource that never ends, or is free for everyone — be it government, businesses or people. The other side of this is that protecting nature looks like a huge cost. For example, imagine you’re building a road or railway through an area. Then you find out that this space is the special habitat of a unique and red-listed bird, and that we can protect this species if we build around its home. This detour will make the project more expensive in terms of money, but is important to protect biological diversity. This practice makes us ignore nature again and again, slowing down our necessary transformation to a more sustainable society. The result in the massive biodiversity loss we have today, as seen in the planetary boundaries. We’re currently destroying nature at a massive scale, in the name of economic growth. But this will surely come back to bite us!

Thankfully – new fields of economics are coming up at a fast pace

We need to rethink economics to better capture and understand what’s at stake when we ignore nature in our models. Fortunately there are advances being made in this field when it comes to thinking about sustainability and economics. In the coming months we will publish articles about the new ideas that are worth knowing about:

Doughnut economics provide a new framework for thinking about social and ecological, and social sustainability, in one. Remember the name Kate Raworth, she is the famous economist behind the model.

Circular economy – the famous buzzword, circular economics is a new way of structuring production and consumption, and how we think about resources and waste.

The UN’s Sustainable Development Goals that guide economic development to ensure social sustainability.

You could say that economics and sustainability is in a love-hate relationship. Even though the economy led us where we are today – at the brink of ecological collapse – it also holds the key to the solution. If we want to build a sustainable future, we need to get the economics right – and get the economists on board. Only then can we truly make decisions that are good for both people and the planet. Stay tuned!

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