Both Neoclassical and Keynesian economics regard the pursuit of economic growth as the main normative objective of economic theory. Since the seventies of the twentieth century, however, many economists and scientists from other disciplines have started to question the desirability and long term feasibility of economic growth. The seminar work of Georgescu-Roegen The Entropy law and the economic process (1971) outlined the physical limits to economic growth, becoming the foundation of a new transdisciplinary branch of science known as bioeconomics or ecological Economics. According to Georgescu-Roegen, the entropy law is the root of economic scarcity. That is because the economic subsystem behaves as a living organism, that is: it needs an influx of low entropy inputs (energy and matter) from the ecosystem, and it releases a flux of high entropy output. Provided that entropy tends to increase in isolated systems, and that the earth is a closed system (it exchanges energy but not matter with the outside), thermodynamic laws impose a physical limit on the growth of the economic subsystem.
The response of neoclassical economics to this conception was to regard the economic process not as a thermodynamic transformation, but as a mechanical system (Georgescu-Roegen, 1986:11). According to this view, markets reflect and react to scarcity by price changes and therefore input and technological substitution. Accordingly, “the world can, in effect, get along without natural resources, so exhaustion is just an event, not a catastrophe” (Solow 1974:11). This was the origin of the natural resource and environmental economics branch, which integrates the ecosystem in the economic analysis maintaining the main neoclassical foundations, as opposed to ecological economics, which questions the neoclassical axioms and takes a truly transdisciplinary perspective.
The discussion between Buchanan and Krugman represents the contemporaneity of the previously outlined dichotomy between Ecological and Environmental economics respectively. Whilst Buchanan argues the impossibility of perpetual economic growth in a finite planet, in line with other ecological economists such as Constanza (1996, 2008), Daly (1997, 1996, 2014), Jackson (2011), Martinez-Alier (2013) or Naredo (2015); Krugman defends the ability of markets to manage resource and energy scarcity, as stated in most of the mainstream economics literature.
The main argument of the discussion revolves around the hypothesis of decoupling economic growth from energy, emissions and material consumption. Although implicitly assuming that environmental limits exists, Krugman (i.e. neoclassical/keynesian economists) argues that provided that the economy tends to be less energy, emissions and material intense, economic growth is possible without increasing emissions and energy and material consumption. On the other hand, Buchanan (i.e. ecological economists) argues that even though relative decoupling is happening in developed economies, absolute decoupling cannot happen in the long term because dematerialization, unlike infinite proposed economic growth, has limits (i.e. it can never reach 0).
In order to shed empirical light on this discussion, in the upcoming posts we will briefly analyse the decoupling hypothesis regarding the three environmental limits discussed above: energy, emissions and materials.
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