This is “Sustainability Economics”, section 2.1 from the book Sustainable Business Cases (v. 1.0).
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Figure 2.1 Earth
The limits to growthA view of the interaction of human economic systems with global natural resources that under a business-as-usual scenario, the human population will outstrip the ability of Earth to sustain it. concept posits that unlimited economic growth is not possible—that at some point the world’s growing population will consume too great a quantity of natural resources (such as clean water and fossil fuels) for human society to exist. Reverend Thomas Robert Malthus (1766–1834) raised the issue of the growing population in the context of limited food resources in his “An Essay on the Principle of Population.” He postulated that “population, when unchecked, increases in a geometric ratio. Subsistence increases only in an arithmetical ratio.”Thomas Robert Malthus, An Essay on the Principle of Population (London: J. Johnson in St. Paul’s churchyard, 1798). In other words, that human growth would outpace the ability of natural resources to keep up. This was in contrast to the overall positive sentiment of the era of continued human progress and improvement, and he viewed humans to “be condemned to a perpetual oscillation between happiness and misery, and after every effort remain still at an immeasurable distance from the wished-for goal.” As a reverend, Malthus sought to explain why there was poverty and misery, and he believed the reason to be directly attributable to shortages of resources (means of sustenance, such as food).
The limits to growth perspective reached the global public with the 1972 publication of Limits to Growth, a research study by the Massachusetts Institute of Technology (MIT) Systems Lab, released by the Club of Rome. Since its publication, the book has sold millions of copies in thirty different languages.
MIT scientists ran a computer simulation of an integrated global model (called World3) that linked the world economy with the environment. The five main variables in the model were world population, industrial production, food production, resource consumption, and pollution. The authors explored interrelationships and feedback patterns by altering growth trends among the five variables.
The model predicted that continued growth in the global economy would lead to global population and economic collapse in the mid-twenty-first century as a result of increased ecological damage and decreased resources. They also found that collapse could be avoided with changes in policy, behavior, and technology.
The study presented, what was for many at the time, a novel finding that the demands of the human population could exceed the carrying capacityThe population of a species that the environment can sustain indefinitely. This is also known as sustainable harvest or sustainable catch. of the earth. The MIT group identified the need to stabilize growth so that humans could live within the ability of the earth’s natural system to provide a sustainable yield of resources essential to human life. They found that technology alone could prolong but not prevent a system collapse. In an increased technology scenario in which 75 percent of materials were recycled, pollution reduced to 70 percent of 1970 levels, and agricultural land yields increase 100 percent, world collapse was pushed off to the end of the twenty-first century.The Limits to Growth: A Report for the Club of Rome’s Project on the Predicament of Mankind (New York: Universe Books, 1972).
Here is an illustrative example of the concept of limits to growth. Assume that five acres of grassland is required to sustainably feed one cow annually. This means that five acres is able to regenerate itself and support the grazing of one cow and that this same cycle of growth and consumption can occur year after year. In other words, the carrying capacity of five acres of grassland is one cow. If you were a farmer with one hundred acres of grassland and you had one cow, there would be more than enough grass available to feed that one cow and have the grass regenerate itself for perpetuity. The farmer could add up to twenty cows on the one hundred acres and every year the grassland would produce enough grass to feed all twenty cows.
Now suppose the farmer wants to increase his annual profits, and he adds another ten cows to the one hundred acres. There probably is enough grass to feed those cows for that year, but now the overgrazing is compromising the ability of the grass to replenish itself. The resource base degrades because the demands on the grassland are greater than its capacity. Perhaps the next year only 90 percent of the grass grows back, and it is not as healthy as before. Continuous overgrazing further degrades the grassland until it is no longer capable of supporting any cattle.
What would happen instead if the farmer believing that he can push profits even further decided to increase the herd size each year by another ten cows? Then the degradation of grassland will proceed at an even faster rate. Even if the farmer does achieve some short-term profitability increase by exploiting the grassland, it is at the expense of productive grassland in the future. Once damaged, it may take years or decades for the grassland to recover or it may never return to its former productive capacity.
This example illustrates the basic concept of limits to growth—that at some point rising resource demand runs into some very hard resource limitations.
It can be argued that throughout most of the nineteenth and twentieth centuries the dominating paradigm in the United States and Europe and most of the developed world has been that there were few limits to economic growth and that economic growth is always desired.
“No limits to growthA view of modern economic society that maintains that man will be able to maintain constant growth and overcome resource limitations.” is not an articulated theory per se, but it is, to a significant degree, implicit in modern economic thinking. “No limits” thinking highlights the efficacy of the private market. Underpinning “no limits” is the idea that resource scarcity—a major factor in “limits to growth” thinking—can be effectively addressed by economic laws of supply and demand. Laws of supply and demand do work; as resources become scarce, the market will reduce use by increasing the price of those resources.
The market and laws of supply and demand can serve to reduce demand for scarce resources and guide resource allocation to technology and innovation investments that can help address scarce resource concerns. Technology can help reduce resource demand through more efficient use of those resources. For example, a programmable thermostat can more efficiently heat and cool homes than a traditional thermostat. Increased prices will also favor substitution where another resource may be used in place of the scarce resource. An example of this would be building materials or furniture that no longer are produced using 100 percent real wood, as wood has become more scarce and expensive, but instead use wood-laminate and alternative composite materials.
Julian Simon (1932–98), a professor of business administration at the University of Maryland, is often cited in relation the cornucopia theoryAn ideology that human economic systems can overcome “and thrive” in the face of resource constraints and that there are no limits to economic or population growth.—that there are no physical limitations on economic growth or human population. In Simon’s book The Ultimate Resource (published in 1983), he states, “The supply of natural resources is infinite. Almost all trends in environmental quality are positive…There is only one scarcity: Human brain power ‘the Ultimate Resource.’”Julian Simon, The Ultimate Resource (Princeton University Press, 1983). He argued that human ingenuity combined with the correct market signals (pricing) would allow for humans to continually grow economically and the overall human condition would continue to improve, not worsen. He believed that increased consumption would heighten scarcity, which would translate into higher prices, in the short term. This would in turn stimulate entrepreneurship to seek new ways to satisfy shortages. Society eventually ends up better off than if the original shortage had not occurred.
NeoliberalismAn economic view that the private sector, not government, should determine economic and political priorities. This view emphasizes the private sector, open global trading markets, and tax reform. is a view of the global economic system that holds to the overall tenets of no limits to growth and cornucopian theory. In this view, the private sector, not government, should determine economic and policy priorities. Consistent with a cornucopian viewpoint, neoliberalism views business entrepreneurship (unfettered from government regulations and trade restrictions) as being able to make society better off by letting the marketplace determine the use of resources.
Related to this view of unlimited economic growth are consumerism and the underlying assumption that more consumption is always better for the economy. ConsumerismEconomic growth based on continuous and significant consumption of goods and services. is the belief that our economic systems should favor consumption and that the consumption should be for goods and services that are in excess of basic material needs for survival. Consumerism not only attempts to meet material needs and wants but allows for continuous economic growth. Christine Frederick (1883–1970), a home economist, discussed the need for planned obsolescenceDesigning products so that they will have a limited useful life so that consumers will need to dispose of those products and purchase new ones. This was believed to help stimulate economic activity. in an industrial economy stating, “The way to break the vicious deadlock of a low standard of living is to spend freely, and even waste creatively.”Christine Frederick, The New Housekeeping: Efficiency Studies in Home Management (Doubleday, Page & Company, 1913). In 1955, economist Victor Lebow observed, “Our enormously productive economy…demands that we make consumption our way of life…we need things consumed, burned up, replaced and discarded at an ever-accelerating rate.”Victor Lebow, “Price Competition in 1955,” Journal of Retailing, Spring 1955.
Currently, 70 percent of the $14 trillion US economy is driven by consumer spending. A focus on consumption, however, puts tremendous demand on natural resource systems. Natural resources are required to extract, produce, and transport the goods that we purchase, and the extraction, production, and transportation of these goods often release pollution and toxic chemicals in the process. Consumerism is not just limited to the United States, but as globalization of the economy continues, it is becoming universal across the world. Emerging economies such as China, India, Brazil, and Russia have experienced significantly increased demand for goods and services by consumers.
In the chapter on entrepreneurship, innovation, and sustainability, the market opportunities created by scarce resources are highlighted. The chapter will discuss how market signals regarding scarce resources can provide business opportunities for sustainable businesses.
The two views of limits to growth are both important for the business context of sustainability. Both views, at a fundamental level, influence sustainability discussions at a personal, business, and societal level. The earth does have limited resources and human activity can negatively impact the environment. Market forces are often effective in providing signals to society of resource scarcity and the need to change, innovate, and adapt. But even with the overall efficacy of markets, there are limits to the efficacy of the market perspective. Markets often fail to properly price natural resources that are treated as free goods, and this makes limits to growth a reality. Both arguments make important points that frame discussions of sustainability.
An important concept relevant for sustainability is the “tragedy of the commonsA situation where different parties share a common good (such as open public land), and acting independently in their own self-interest, they will ultimately overexploit and deplete or destroy the shared resource..” This phrase was coined by the ecologist Garrett Hardin in a 1968 article in Science.Garrett Hardin, “The Tragedy of the Commons,” Science 162, no. 3859 (1968): 1243–48. The tragedy of the commons describes a situation where different parties share a common good (such as open public land), and acting independently in their own self-interest, they will ultimately overexploit and deplete or destroy the shared resource. The tragedy is that the individuals acting in a way that they believe is in their own best interest end up acting in a way that is detrimental to their collective and individual long-term best interests.
There are numerous examples of tragedy of the commons in modern life and the environment, including polluting the atmosphere, overharvesting fish stocks (see “What Happened to All the Fish” as follows), and polluting waterways. Related to our cattle example in the limits to growth discussion mentioned previously, tragedy of the commons can be illustrated in a simplified example involving cattle. If several cattle herders share a common (publicly shared) area of land and all herders are entitled to let their cattle graze on that land without restriction, there is the potential for tragedy of the commons to occur.
For each individual herder, it is in their self-interest to maximize their profitability by placing as many cattle as possible on the land. There is no direct incremental resource cost to the herder for each cow they add to the shared land, and the herder has increased revenue through greater cattle sales. If each herder acted in this manner, the quality of the common resource can be either temporarily or permanently damaged as a result of overgrazing if the total cattle population exceeds the carrying capacity of the shared land. Once carrying capacity is exceeded, all are negatively impacted, including, ironically, the herders who added to their cattle stock.
In this system, each herder receives all the benefits from adding additional cattle, while the resource damage to the common land is shared by all herders. What should also be noted is there is no economic incentive in this example for a herder to withhold cattle from the land because even if one herder chose not to add additional cattle over concern about damaging the shared land, there is nothing to prevent another herder from adding more cattle resulting in the same end result of a depleted resource.