Category Archives: Ecological Economics

Connecting the Instability of Markets and Ecosystems – C.S. Holling and Hyman Minsky

Both markets and ecosystems can, and have, been viewed as being shaped by feedback processes that push them towards a steady state – in markets this is the “invisible hand” – in ecology it is “succession.”  However, what has been appreciated in ecology, and has been reluctantly included in economics is that these invisible hands can push systems into turbulence or even tear them apart.

The 2008 financial crisis revived widespread interest in the work of American economist Hyman Minksy who developed a theory on the evolution of financial crises that not only provides a strong framework to understand the forces that created the crisis but also has strong parallels to the work of Canadian ecologist C.S. “Buzz” Holling, an originator of resilience thinking, who developed a theory of social-ecological crises that shares many features with Minksky’s theory.

Minsky and Holling both showed how successful regulation could lead systems into a trap of decreasing resilience and increased vulnerability.

Minsky’s “Financial instability hypothesis” argues that as an economy flourishes people and organizations lose their motivation to consider the possibility of failure, because the costs of concern are high and apparent while the benefits of a relaxed attitude are immediate.  Loans become less and less secure, bad risks drive out good, and the resilience of the entire economy to shocks is reduced. Minsky argued that economic resilience is slowly eroded as there is a shift of dominance between three types of borrowers: hedge borrowers, speculative borrowers, and Ponzi borrowers.   Hedge borrower have a cash flow that they can use to repay interest and principal on a debt, while the speculative borrower can cover the interest, but must continually roll over the principal, and Ponzi borrowers, who have to borrow more to cover their interest payments.  Hedge borrowers are least vulnerable to economic changes, while Ponzi borrowers are the most.  As the economy does well, speculative and Ponzi borrowers can outperform safer borrowers.  For example, highly leveraged investments in housing can yield big profits as house prices increase, driving further investment in housing and housing price increases.  As the use of Ponzi finance expands within the finance system the financial system becomes increasingly vulnerable to any change in the perceived value of Ponzi borrowers assets can trigger a collapse that includes speculative and hedge borrowers.  When a shock or change in perception causes the networks of loans to unravel, crisis moves from the financial sector other parts of the economy.  This theory fits many aspects of the 2008 financial crisis where public and private risk regulations were relaxed, and there was a lot of speculative and Ponzi borrowing in the US housing market.  For example, financial market regulationaccounting standards were lowered, and mortgage risk assessments were abandoned.

Similarly, Holling’s “Pathology of ecosystem management” argues that the management of ecosystems to increase the production of a desired ecological services often achieve their goal by simplifying ecosystems and reducing environmental variation. For example, forest management removes undesired species and suppresses wildfire and produces more timber which leads to sawmills and jobs. While these efforts are often initially successful, over the longer term these effort can trap a system into a situation where there is:

1) a high societal dependence on continuous supply of ecological benefits and

2) a declining ability of an ecosystem to recover from and regulate environmental variation.

Holling’s adaptive cycle concept grew out of the pathology of natural resource management.

Societal dependance arises as investment follows the initial success.  The decline in ecological resilience occurs because of management’s simplification the spatial pattern, food web, and disturbance dynamics of the managed ecosystem.  Often as resilience declines, management has to increasingly invest in artificial ecological regulation to maintain ecological benefits and protect its sunk investment infrastructure.  This dynamic can trap people within a social-ecological system which is unprofitable, has low resilience, and is difficult to disengage from due to sunk cost effects.  For example, logging and forest can lead to more investment in timber mills and towns and the simplified forest, which is more vulnerable to insect outbreaks.  These continual outbreaks require investment in pest control, which decreases the profitability of the logging.  Simultaneously, it is difficult to stop logging or pest control due to the people living in the towns and the investment in the timber mills.

Holling’s pathology was originally developed in the 1980s.  Since then Holling’s ideas have been substantially developed by ecologists and others environmental scientists over the past twenty years (notably in the book Panarchy).  Researchers have tried to identify different types of social-ecological traps.  Resilience researchers have created quantitative models explore and statistical methods to detect instabilities, and expanded upon the pathology to explore the roles of leadership and agency in creating new social-ecological trajectories.

Unlike Holling’s work, Minsky’s work has been largely marginalized within mainstream economics, though it has retained a dedicated following among financial and some hetrodox economists.  The lack of a rigourous mathematical structure to Minsky’s ideas seems to have been much more of a barrier in economics, than the similar lack in Holling’s ideas was to ecology.  However, I expect that the main reason for the lack of interest was that instability was not seen as a particularly relevant idea. The financial turmoil of the last few years has shown that despite economists dreams of a great moderation due to wise regulation, regulators and markets have not been able to tame the destabilizing dynamics of global markets.  Indeed, the financial crisis of 2008 and the recession that has followed has demonstrated that many regulations likely have made this crisis worse by reducing diversity, tightening couplings, and decreasing adaptive capacity.  For example, the Euro prevented countries, like Greece or Spain, from shifting their exchange rates with other countries.

However, the crisis has provoked substantial new interest in Minksy, and now eminient mainstream economists such as Paul Krugman have now attempted to connect his work to the central core of economics (see Eggertsson & Krugman 2012  paper & a critique from hetreodox financial economist Steve Keen).

The financial, political, price turbulence since 2008 has increased interest in theories of instability, but most theory is based upon stability, or short term departures from stable points.  This undersupply of theories of instability, makes the work of Holling and Minksy more valuable.  In separate realms and identifying different mechanisms, the work of Minsky and Holling suggests instability cannot be avoided, as stability creates instability.  This understanding can be used to help navigate instability, and it highlights the value of working to create new theories to understand, analyze, and navigate social-ecological instability – something that we are working on at the Stockholm Resilience Centre.

Further readings:

Holling (many followup articles are available in Ecology & Society)

  • Holling, C.S., 1986. The resilience of terrestrial ecosystems: local surprise and global change. In: Clark, W.C., Munn, R.E. (Eds.), Sustainable Development of the Biosphere. Cambridge University Press, London, pp. 292–317.
  • Holling, C.S., Meffe, G.K., 1996. Command and control and the pathology of natural resource management. Conservation Biology 10, 328–337.
  • Gunderson, L.H. & Holling, C.S. (Eds.). 2002. Panarchy: Understanding Transformations in Human and Natural Systems. Island Press.

Minsky (lots of his publications are available on the Levy Institute’s website)

  • Minsky, H. P. (1975). John Maynard Keynes. New York, Columbia University Press.
  • Minsky, H. P. (1982). Can “it” happen again? : essays on instability and finance. Armonk, N.Y., M.E. Sharpe.
  • Minsky, H. P. (1986). Stabilizing an unstable economy, Twentieth Century Fund Report series, New Haven and London: Yale University Press.
  • Wray, L.R. 2011 Minsky Crisis in The New Palgrave Dictionary of Economics, Online Edition, 2011.  Edited by Steven N. Durlauf and Lawrence E. Blume. Palgrave.

On the web Ashwin Parameswaren has been building on Minksy and Holling’s ideas at his websites Macroeconomic resilience and All systems need a little disorder.

Digging the Anthropocene

Human material use has rapidly and massively increased over the past century.  This is nicely illustrated in a 2009 paper by Krausmann and others at the Institute of Social Ecology in Vienna.

Fig. 1. Materials use by material types in the period 1900 to 2005. (a and b) total materials use in Giga tons (Gt) per yr; (c) metabolic rate (materials use in t/cap/year); (d) share of material types of total materials use.

The use of material has exploded:

  • overall use of material grew 8X
  • construction minerals grew 34X
  • ores/industrial minerals 27X.
  • fossil fuel energy carriers 12.2X
  • biomass extraction 3.6X.

This expansion is due to the growth of the human economy and population. Despite advances in efficiency (i.e. the amount of materials required per unit of GDP has declined), the economy has grown faster so total materials use per capita doubled from 4.6 to 10.3 T/cap/yr.

For most of the 20th century, biomass was the most significant of the four material types in terms of mass and only in the 1990s it was overtaken by construction minerals.

In 2000, the 15% of the world’s population living in rich countries were directly responsible for 1/3 of global resource extraction; however this inequality is more pronounced  for key materials the 15% of the world’s population living in rich countries consume more than 50% of  fossil energy carriers, industrial minerals and metallic ores (a 6X greater rate for the 15% vs. the 85%).

If global economic development continues its current trajectory (with a population growth of 30–40% until 2050) the will be a continuing sharp rise in global material extraction.

From:

Krausmann, F., Gingrich, S., Eisenmenger, N., Erb, K.-H., Haberl, H. & Fischer-Kowalski, M. 2009. Growth in global materials use, GDP and population during the 20th century. Ecological Economics, 68, 2696–2705. http://dx.doi.org/10.1016/j.ecolecon.2009.05.007

Robert Harrison on Joesph Conrad

Stanford humanities professor Robert Harrison has a great online podcast, Entitled Opinons, that discusses various aspects of the Humanities.

Robert Harrison is a Dante specialist, but he is also very interested in people’s relationships with the Earth.  His enthralling books Gardens: An Essay on the Human Condition, and Forests: The Shadow of Civilization provide much food for thought.

His shows cover diverse topics and thinkers such as Michel Foucault, eco-critic Ursula Heise on Extinction, and A Monologue on Machiavelli.

In his show on Joesph Conrad’s Heart of Darkness |MP3| he gives a (to me) an interesting environmental interpretation of the novel.  He states (transcript from Beams & Struts):

What did the intervening century [since Joseph Conrad’s book Heart of Darkness was written] do to change the situation [of Western nihilism outlined in that book]?  If one is honest, precious little. On the contrary, the twentieth century just enacted the most virulent forms of Western nihilism through two catastrophic world wars, and the endless genocides associated with communism and cold war politics and so forth. So it’s very difficult I think to soberly look back on the twentieth century and to say that the vision of nihilism that Conrad puts forward in ‘Heart of Darkness’ was not well founded.

I think it was well founded, raising the question of whether we are to be stuck in that dark hole that he so vividly  portrays for us, or whether the twenty-first century might find a way out of it…

One of the visions that Conrad has of Western nihilism in ‘Heart of Darkness’ is of the sheer carelessness of the Western rapacious attitude toward Africa and the continent of Africa, as raiding its resources, and taking from the Earth as much as one can take without giving anything back in return. And this is the formula for nihilism.

Conrad’s ‘Heart of Darkness’ sees Western modernity as a kind of ferocious drive to extract as much out of the Earth as possible without giving anything back to it…So the question for the twenty-first century will be whether a turn is possible in our relations with the Earth, whether we can return to the primary human vocation of being caretakers rather than destroyers in our relation to the Earth.

Forty years of Limits to Growth

The first presentation of the influential environmentalist book Limits to Growth was on March 1 in 1972 at the Smithsonian Institution in Washington DC, four decades ago.

The study was both hugely influential and hugely controversial, and the authors were quite strongly attacked, often for analytical flaws that their study never said or did.  However, after two followup books, and renewed discussions of peak oil (etc) & planetary boundaries, there has been an increased appreciation of Limits to Growth.

After 40 years it seems that:

  1. Limits to Growth was a pretty good first stab at a global model (look at the number of models based on it)
  2. That the scenarios in Limits to Growth were fairly reasonable  (see here and here, here)
  3. That humanity has avoided some really bad trajectories, but could have done a lot better
  4. And that today, global civilization is pushing up against all sort of boundaries and we require more and more innovation to keep going and
  5. We probably need to have a major societal transformation to create a good Anthropocene.

For more on this, see Australian corporate environmentalist Paul Gilding‘s book Great Disruption, just is based on a similar assessment of the world – and he just gave a TED talk based on the book.

Various Limits related events have been timed for this 40th anniversary.

First, the Smithsonian is hosting Perspectives on Limits to Growth – which will feature two of the original members of the team that wrote Limits.  They describe the seminar:

The Club of Rome and the Smithsonian Institution’s Consortium for Understanding and Sustaining a Biodiverse Planet are hosting a symposium on March 1, 2012 to celebrate the 40th anniversary of the launching of Limits to Growth, the first report to the Club of Rome published in 1972. This book was one of the earliest scholarly works to recognize that the world was fast approaching its sustainable limits. Forty years later, the planet continues to face many of the same economic, social, and environmental challenges as when the book was first published.

The morning session will start at 9:00 a.m. and will focus on the lessons of Limits to Growth. The afternoon session will begin at 1:45 p.m. and will address the difficult challenges of preserving biodiversity, adjusting to a changing climate, and solving the societal issues now facing the planet. The symposium will end with a thought-provoking panel discussion among the speakers on future steps for building a sustainable planet.

The meeting will be live-streamed and video archived on the internet at Perspectives on Limits to Growth.

Second, coinciding with the with anniversary is the release an interesting report Life beyond Growth 2012.  Alan AtKisson, author of Believing Cassandra and colleague of many limits authors, wrote the report for the Japanese Institute for Studies in Happiness, Economy, and Society.

Life Beyond Growth is the product of a year of research and reflection, during which the world experienced tumultuous changes, ranging from the Arab Spring to the Great East Japan Earthquake to the “Occupy” movement to the near-meltdown of the Eurozone.

Despite all the economic and political turmoil, a revolution in economic thought continued to gain steam. From “Green Economy” to “Gross National Happiness” to the more radical notion of “De-growth,” governments around the world have continued to explore new ways to frame, and measure, the idea of national progress. Most recently, the United Nations has formally joined the dialogue, with its own high-level panel calling for “new ways to measure progress” in advance of the Rio+20 global summit.

And third, one that was not planned to coincide with the anniversary, but is importantly connected Victor Galaz and many other have a new paper Planetary boundaries’ — exploring the challenges for global environmental governance, which is not freely available, in Current Opinion in Environmental Sustainability (http://dx.doi.org/10.1016/j.cosust.2012.01.006).  The article (from the abstract):

… provides an overview of the global governance challenges that follow from this notion of multiple, interacting and possibly non-linear ‘planetary boundaries’. Here we discuss four interrelated global environmental governance challenges, as well as some possible ways to address them. The four identified challenges are related to, first, the interplay between Earth system science and global policies, and the implications of differences in risk perceptions in defining these boundaries; second, the capacity of international institutions to deal with individual ‘planetary boundaries’, as well as interactions between them; third, the role of international organizations in dealing with ‘planetary boundaries’ interactions; and fourth, the role of global governance in framing social–ecological innovations.

Richard Wilkinson gives a TED talk on impact of inequality

Richard Wilkinson, well known British public health researcher and co-author of the recent influential book on economic inequality the Spirit Level (which has been previously mentioned on Resilience Science) gives a TED talk about his research on the social impact of inequality.

More on his research and his advocacy of social change is on the Equality Trust‘s website.

Climate Stablization Wedges – an update, responses and critiques

A well know proposed strategy for reducing carbon emissions was the 2004 “wedges” paper in by ecologist Stephen Pacala and engineer Robert Socolow (Science DOI: 10.1126/science.1100103). For more on wedges see Carbon Mitigation Initiative website at Princeton.

Robert Socolow has recently published an update on the wedges paper, in Bulletin of the Atomic Scientists, which discusses the failures of their proposal, he reaffirms the wedges approach and argues that they should have presented their work differently – specifically:

…advocates for prompt action, of whom I am one, also bear responsibility for the poor quality of the discussion and the lack of momentum. Over the past seven years, I wish we had been more forthcoming with three messages: We should have conceded, prominently, that the news about climate change is unwelcome, that today’s climate science is incomplete, and that every “solution” carries risk. I don’t know for sure that such candor would have produced a less polarized public discourse. But I bet it would have. Our audiences would have been reassured that we and they are on the same team — that we are not holding anything back and have the same hopes and fears.

and he proposes that:

To motivate prompt action today, seven years later, our wedges paper needs supplements: insights from psychology and history about how unwelcome news is received, probing reports about the limitations of current climate science, and sober assessments of unsafe braking.

There are responses onThe Bulletin of the Atomic Scientists website and Climate Central that include the Nicholas Stern and others.

Andrew Revkin on DotEarth has an number of US and energy oriented comments from earth system scientist Ken Caldeira, my former colleague at McGill economist Chris Green and others as well as response from Socolow.

Rob Hopkins from Transition Town movement presents a view from local sustainability action.  He worries that the wedges approach can actually make our current situaiton worse – in Giving Robert Socolow a Wedgie (so to speak). He argues that systemic strategies that improve local resilience could be much more successful by addressing multiple issues that focusing on energy and CO2.

Socolow argues that part of the blame for the fact that the world hasn’t adopted the wedges approach can be laid at the door of the environmental movement, for being so upbeat and chipper about the impacts and not acknowledging that there will be ‘pain’ alongside the ‘gain’ (as it were).  …  I think it is far more likely that most of Pacala and Socolow’s wedges are, ultimately, unfeasible due to their own energy intensity and cost in a contracting global economy.

Socolow and Pacala’s wedges were conceived and proposed solely as responses to climate change.  Yet, of course, climate change is not the only challenge we face.  As the World Economic Forum’s recently-released analysis of the risks facing the world over the next 10 years identified, extreme energy price volatility and the fiscal crisis sit alongside climate change, closely followed by economic disparity, collectively leading the field in terms of risks we need to be building resilience to as a matter of urgency

Seven Reflections on Disasters and resilience from around the web

1) The Boston Globe’s Big Picture photo blog has pictures of Japan one month after the quake & tsunami

2) Andy Revkin comments on DotEarth on the limits of Japan’s disaster memory in response to a fascinating Associated Press article by by Jay AlabasterTsunami-hit towns forgot warnings from ancestors.

3) And Andy Revkin also wonder’s whether nuclear power is simply too brittle to be a resilient power source.

4) Richard A. Kerr writes in Science Magazine article Long Road to U.S. Quake Resilience about recent NRC report that argues that it is underfunding programs to develop resilience to Earthquakes.

5) New York Times on how Danger Is Pent Up Behind Aging Dams. Apparently of the USA’s 85,000 dams, more than 4,400 are considered susceptible to failure, but governments cannot agree on who should pay for renovations.

6) Bob Costanza and others write in Solutions magazine on Solutions for Averting the Next Deepwater Horizon.  They argues that sensible resource development should require resource developers to purchase disaster bonds to capture true social costs of resource development

7) In New York Times Leslie Kaufman writes on complexity and resilience of Gulf of Mexico’s ecosystems response to BP Oil Spill.

Controversies around the Social Cost of Carbon

What is the social cost of carbon? That is,the monetary value of the long-term damages done by greenhouse gas emissions? Frank Ackerman from the Stockholm Environment Institute U.S. Center, recently gave a fascinating talk at the Stockholm Resilience Centre where he presented the widely used FUND-model, an integrated assessment model of climate change that links climate change science with economics. According to Ackerman, the interesting aspect with this model is not only that it is commonly cited by policy-makers in the US, but also that some of its basic assumptions, lead to quite bizarre results. The policy implications can not be overestimated.

As Ackerman notes in the TripleCrisis blog:

True or false: Risks of a climate catastrophe can be ignored, even as temperatures rise? The economic impact of climate change is no greater than the increased cost of air conditioning in a warmer future? The ideal temperature for agriculture could be 17oC above historical levels?

All true, according to the increasingly popular FUND model of climate economics. It is one of three models used by the federal government’s Interagency Working Group to estimate the “social cost of carbon” – that is, the monetary value of the long-term damages done by greenhouse gas emissions. According to FUND, as used by the Working Group, the social cost of carbon is a mere $6 per ton of CO2. That translates into $0.06 per gallon of gasoline. Do you believe that a tax of $0.06 per gallon at the gas pump (and equivalent taxes on other fossil fuels) would solve the climate problem and pay for all future climate damages?

I didn’t believe it, either. But the FUND model is growing in acceptance as a standard for evaluation of climate economics. To explain the model’s apparent dismissal of potential harm, I undertook a study of the inner workings of FUND (with the help of an expert in the relevant software language) for E3 Network. Having looked under the hood, I’d say the model needs to be towed back to the shop for a major overhaul.

A working paper that teases the critique in detail can be found here. To summarize the conclusions for non-economists: the social cost of carbon is way higher than $6 per ton of CO2….

Green Growth vs. No Growth – a debate on CBC’s Ideas

CBC’s radio show Ideas recently hosted and then podcast a debate on Green Growth or No Growth at the University of Ottawa.  The debate starts from accepting the idea that humanity faces serious environmental problems.  The debaters then debate the resolution: Be it resolved that building an environmentally sustainable society will require an end to economic growth.

I disagree with the idea framing the debate that human impact on the natural world is always problem. While reducing the environmental impact per unit of human wellbeing is good, we can also work to shift the impacts of human impact from a negative to a positive. Or in other words we can also choose to invest in the building, enhancing, restoring Earth rather than only reducing the amount we impact it.

The program was released as a downloadable podcast on February 28, 2011, and will be available until the end of March.  The podcast can be found at at http://www.cbc.ca/podcasting/index.html?newsandcurrent. Click on the link and scroll about half way down the page, click “The Best of Ideas” link.

The ‘no-growth’ side was:

Peter Victor
Author of Managing Without Growth: Slower By Design, Not Disaster, professor (and former Dean) at York University, and former Assistant Deputy Minister in the Ontario government.

Tim Jackson
Economics commissioner with the UK Sustainable Development Commission, professor at the University of Surrey (UK), and author of Prosperity without Growth – economics for a finite planet.(external link)

The ‘green-growth’ side was:

Richard Lipsey
one of Canada’s pre-eminent economists, professor emeritus at Simon Fraser University, and author of Economic Transformations: General Purpose Technologies and Long Term Economic Growth.

Paul Ekins
Author of Economic Growth and Environmental Sustainability: The Prospects for Green Growth, professor at University College London, and Director of the UK Green Fiscal Commission.

Living in the Anthropocene

On Yale360 Paul Crutzen and Christian Schwägerl write that Living in the Anthropocene:

Living up to the Anthropocene means building a culture that grows with Earth’s biological wealth instead of depleting it. Remember, in this new era, nature is us.

In the March 2011 National Geographic, environmental journalist Elizabeth Kolbert writes Enter the Anthropocene—Age of Man, which describes the idea and the geological changes being produced by humanity.  This article looks at the anthropocene more from the point of view as damage to the biosphere, rather than what we can do to reduce that damage and increase human wellbeing. It is illustrated by photos two of which are shown above.

For more on living in the anthropocene, see our 2009 post resilience as an operating system for the anthropocene on Chris Turner‘s article Age of Breathing Underwater on the anthropocene in the Walrus, as well as our recent article on the Environmentalist’s Paradox.