Question

Economist Herman Daly characterizes neo-classical economic theory as being analogous to a biologist trying to understand the functioning of an animal by considering only its circulatory system and ignoring its digestive system which connects the animal “firmly to the environment at both ends!” How is this analogous to neo-classical economic theory? What kind of environmental problems does this kind of neo-classical economic thinking lead to? Explain and provide examples.please type answer

Answer 1

(1) : ANALOGOUS TO NEO-CLASSICAL ECONOMIC THEORY :

• Neoclassical economics is an approach to economics focusing on the determination of goods, outputs, and income distributions in markets through supply and demand. This determination is often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by firms facing production costs and employing available information and factors of production, in accordance with rational choice theory, a theory that has come under considerable question in recent years.
• Neoclassical economics dominates microeconomics and, together with Keynesian economics, forms the neoclassical synthesis which dominates mainstream economics today.Although neoclassical economics has gained widespread acceptance by contemporary economists, there have been many critiques of neoclassical economics, often incorporated into newer versions of neoclassical theory, but some remaining distinct fields.

Prof Herman Daly is one of the founding fathers of the emerging discipline of ‘ecological economics’. He has long argued that to achieve genuine sustainability, the global community should be transitioning to a ‘steady-state’ economy based on ecological principles derived from biophysical reality.

Despite demonstrably sketchy origins, paradigms of all kinds assert enormous power over expressed human behavior. Indeed, it is truly remarkable that individuals and whole societies live in the real biophysical world guided by the parameters of various myths, paradigms, social norms and cultural narratives that may have only a tenuous grip on that same reality.

Neoclassical economics assumes a person to be a lightning calculator of pleasures and pains, who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift about the area, but leave him intact.

• According to Prof Herman Daly , Economists tend to focus on markets or aggregate outcomes instead of observing individual behavior. Neoclassical economists have argued that evolutionary or "market forces" tend to select naturally the most “fit“ actors. Hence, neoclassical economic theories are based on assumptions that (competitive) markets provide an environment that involves incentives for economic actors to learn optimal behavior, on average, in the long run.
• Economists have focused too much on the economy’s circulatory system and have neglected to study its digestive tract. Throughput growth means pushing more of the same food through an ever larger digestive tract; development means eating better food and digesting it more thoroughly. Clearly the economy must conform to the rules of a steady state—seek qualitative development, but stop aggregate quantitative growth. GDP increase conflates these two very different things.

(2). Kind of environmental problems does this kind of neo-classical economic thinking leo to to many problems :

• This kind of neoclassical economic thinking leads to many environmental problems.The quantitative expansion of the economic subsystem increases environmental and social costs faster than production benefits, making us poorer not richer, at least in high consumption countries. Given the laws of Diminishing Marginal Utility and increasing Marginal Costs this should not have been unexpected. And even new technology sometimes makes it worse.
• For example, tetraethyl lead provided the benefit of reducing engine knock, but at the cost spreading a toxic heavy metal into the biosphere; chlorofloro carbons gave us the benefit of a nontoxic propellant and refrigerant, but at the cost of creating a hole in the ozone layer and a resulting increase in ultraviolet radiation. It is hard to know for sure that growth now increases costs faster than benefits since we do not bother to separate costs from benefits in our national accounts. Instead we lump them together as “activity” in the calculation of GDP.

Ecological economists have offered empirical evidence that growth is already uneconomic in high consumption countries. Since neoclassical economists are unable to demonstrate that growth, either in throughput or GDP, is currently making us better off rather than worse off, it is blind arrogance on their part to continue preaching aggregate growth as the solution to our problems.

1. The classical steady state takes the biophysical dimensions— population and capital stock (all durable producer and consumer goods)— as given and adapts technology and tastes to these objective conditions.
2. The neoclassical “steady state” (proportional growth of capital stock and population) takes tastes and technology as given and adapts by growth in biophysical dimensions, since it considers wants as unlimited, and technology as powerful enough to make the world effectively infinite.
3. At a more profound level the classical view is that man is a creature who must ultimately adapt to the limits (finitude, entropy, ecological interdependence) of the Creation of which he is a part. The neoclassical view is that man, the creator, will surpass all limits and remake Creation to suit his subjective individualistic preferences, which are considered the root of all value.