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2.1 Interdependence

The 'cowboy economy'

Prior to the advent of natural resource and environmental economics, economists paid relatively little attention to the relationship between the economy and the environment, partly because, in the early days of neoclassical economics, the economy did not appear to face major environmental constraints and also because environmental issues were considered less important than economic growth. The economic system received inputs from the environment and delivered waste back to the environment (as depicted in 2.1.1) but little attention was given to how the extraction of inputs might affect the environment or the environment's ability to deliver those inputs to the economy in the future. Nor was much thought given to the impact of putting waste back into the environment - in particular, how that waste might affect the environment's future ability to absorb waste or its ability to perform other functions for the economy, including life-support functions and the provision of amenity services (agreeable living spaces, recreation etc).

Kenneth Boulding, one of the early inspirations for ecological economics, called this view of the economy-environment relationship the 'cowboy economy' (Boulding 1966), in an analogy that is suggestive of the 19th century American 'wild west' where seemingly limitless natural resources were up for grabs to anyone venturing away from the more developed and densely populated eastern seaboard.

2.1.1 The 'cowboy economy

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Source: unit author

Economic analysis of the environment

The advent of natural resource economics and environmental economics represented a move away from the 'cowboy economy' model to one in which economic analysis took account of the impact of the economy on the environment and how this impact fed back into the economy. This is depicted in 2.1.2 which is a very simplified representation of the economy-environment relationship.

2.1.2 Natural resource and environmental economics

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Source: unit author

Raw materials from the environment provide economic benefits, but their current extraction, in turn, affects the prospects of future extraction (hence, the two-way arrow). This is the particular concern of natural resource economics. The figure also shows waste from production and consumption which cause pollution and feeds back to the economy via the latter's negative impact on human health and amenity values. These relationships can be analysed using the tools of environmental economics. The approach of both natural resource economics and environmental economics is to treat the environment as a source of services or inputs into the economy. These and any negative externalities arising from waste or over-extraction are given economic values, thereby bringing the environment into the accounting framework of the economy.

Boulding's 'spaceship earth'

Another way of conceptualising the economy-environment relationship is depicted in 2.1.3. Here the economy is located physically within a larger system - the environment - which (apart from solar energy and energy radiated back into space) is a closed system with no material exchange across its borders. Boulding (1966) likens this to a 'spaceship' with strictly limited life-support capabilities that depend upon achieving a delicate balance between consumption, material recycling, and energy harnessed from outside. The larger the economy is in relation to the environment, the harder it is to maintain this balance. Indeed, many people think that, in material terms, the economy is already too big. However, whilst some believe the solution lies in reigning back consumption and halting economic growth, others see the balance being restored through technological innovation (eg cleaner energy) and institutional change (eg giving environmental services an economic value and ensuring that environmental damage is not treated as if it were cost-free).

2.1.3 'Spaceship earth'

Source: unit author

Clearly there are many institutional changes needed to place the economy-environment relationship on a more sustainable footing. Natural resource and environmental economics provide useful insights for policy-makers seeking to set priorities for institutional reform. However, the relationship between the environment and the economy is extremely complex and deeply intertwined with the political and social forces behind resource allocation and institutional change. Understanding these forces is very important, but largely beyond the scope of mainstream natural resource and environmental economics. For a deeper understanding of these issues it is necessary to look to other disciplines, such as political economy and social psychology.