Optimal Scale

The idea of optimal scale is not strange to standard economists. It is the very basis of microeconomics. As we increase any activity, be it producing shoes or eating ice cream, we also increase both the costs and the benefits of the activity. For reasons we will investigate later, it is generally the case that after some point, costs rise faster than benefits. Therefore, at some point the extra benefits of growth in the activity will not be worth the extra costs. In economist's jargon, when the marginal costs (extra costs) equal the marginal benefits, then the activity has reached its optimal scale. If we grow beyond the optimum, then costs will go up by more than benefits. Subsequently, growth will make us poorer rather than richer. The basic rule of microeconomics, that optimal scale is reached when marginal cost equals marginal benefit (MC = MB), has aptly been called the "when to stop rule" - that is, when to stop growing. In macroeconomics, curiously, there is no "when to stop rule," nor any concept of the optimal scale of the macroeconomy. The default rule is "grow forever." Indeed, why not grow forever if there is no opportunity cost of growth? And how can there be an opportunity cost to growth of the macroeconomy if it is the whole?

Graph from The Environmental Literacy Council

Even if one adopts the basic vision of ecological economics and considers the economy as a subsystem of the ecosystem, there still would be no need to stop growing as long as the subsystem is very small relative to the larger ecosystem. In this "empty-world vision," the environment is not scarce and the opportunity costs of expansion of the economy is insignificant. But continuted growth of the physical economy into a finite and non-growing ecosystem will eventually lead to the "full-world economy" in which the opportunity cost of growth is significant. We are already in such a full-world economy, according to ecological economists.

This basic ecological economics vision is depicted in Figure 2.1 [below]. As growth moves us from the empty world to the full world, the welfare from economic services increases while the welfare from ecological serivces diminishes. For example, as we cut trees to make tables, we add the economic service of the table (holding out plates so we won't have to eat off the floor) and lose the ecological service of the tree in the forest (photosynthesis, securing soil aginst erosion, providing wildlife habitat, etc.) Traditionally, economists have defined capital as produced means of production, where produced implies "produced by humans." Ecological economists have broadened the definition of captial to include the means of production provided by nature. We define capital as a stock that yields a flow of goods and services into the future. Stocks of manmade capital include our bodies and minds, the artifacts we create, and our social structures. Natural captial is a stock that yields a flow of natural services and tangible natural resources. This includes solar energy, land, minerals and fossil fuels, water, living organisms, and the services provided by the interactions of all of these elements in ecological systems.

We have two general sources of welfare: services of manmade captial (dark gray stuff) and services of natural capital (light gray stuff), as represented by the thick arrows pointing to "Welfare" in Figure 2.1. Welfare is placed outside the circle because it is a psychic, not physical, magnitude (an experience, not a thing). Within the circle, magnitudes are physical. If we object to having a nonphysical magnitude in our basic picture of the economy on the grounds that it is metaphysical and unscientific, then we will have to content ourselves with the view that the economic system is just an idiotic machine for turning resources into waste for no reason. The ultimate physical output of the economic process is degreaded matter and energy - waste. Neglecting the biophysical basis of economics gives a false picture. But neglecting the psychic basis gives a meaningless picture. Without the concept of welfare or enjoyment of life, the conversion of material resources first into goods (production) and then into waste (consumption) must be seen as an end in itself - a pointless one. Both conventional and ecological economics accept the psychic basis of welfare, but they differ on the extent to which manmade and natural captial contribute to it.

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Daly, H.E. & Farley, F. (2004) Ecological economics, pirinciples and applications. Island Press.

...[SHOULD THIS BE PUT IN A SEPARATE "Ecological Overshoot" NODE?]

Most of the second half of the book covers the great acceleration of our fossil fuel driven technology age and the impacts it has had on many aspects of our history: geography, economy, technology growth, planetary biology, etc… This is where the book really shines. His key observations, which I believe are spot on, include:

1. Humanity was somewhat stalled at ~Roman-age to middle-ages level of technology and population for many centuries until the discovery of fossil fuel and the technologies to utilize it. This created a rapid positive feedback cycle of growing energy use enabled by rapid technology growth which enables more use of energy, and so on.


2. With globalization, humans have essentially created a “superorganism” under the control of no one but driven by our basal instincts: Not good! We are out of control and cannot help ourselves: We’ll grow and grow and grow until we run into “something”…


3. And that “something” is the fact that planet Earth is finite. And the issue is that we’ve already significantly grown past Earth’s steady state carrying capacity. We may not notice too much now because Earth has (or had) vast resources that we were emptying: i.e. We are draining Earth’s bank accounts and they aren’t quite empty yet. However, when we finally do draw down all those aquifers, chop down all those rainforests, deplete that topsoil, overharvest all those fish, dam all the rivers, and disrupt our climate and oceans, we’ll have such a large population running at such a high level of consumption that it’ll be impossible to slow down enough to make a difference: A crash may be coming!


4. Finally, he touches on the incredibly important element which is this: Regardless of what side of the political spectrum someone is on, most leaders and citizens are ignoring the scope of issue: The Right simply ignores that there is an issue. The Left pretends there are simple technology fixes that can “just be rolled out now” if we just have political agreement (i.e. put up windmills and solar panels, drive an electric car, and “Presto, problem solved!”). Both the Left and Right also are good at pointing the figure elsewhere: For the Right it’s often the rise of China and developing world, for the Left it’s often big companies and the developed world. But they both agree on one thing, it’s never ourselves. The biggest flaw is they all agree we can just keep growing and growing and growing (GDP, Population, Consumption, etc…). ...

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