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The environment of the economy

November 12, 2006

By Jean-Paul Fitoussi
Manila Times, Nov. 8, 2006

NO economy is a closed, autonomous universe, governed by rules independent from law, morals and politics. Indeed, the most interesting economic questions are generally located on the borderline with neighboring disciplines. But nowhere is this clearer than in the interaction between economic processes and the natural environment.

The distinctive feature of this exchange is that it is governed not by the laws of mechanics, but by thermodynamics, particularly the law of entropy, according to which the quantity of free energy that can be transformed into mechanical work diminishes with time—an irreversible process culminating in “heat death.” Numerous researchers, inspired by the late Nicholas Georgescu-Roegen’s pioneering work on the relationship between economic processes and physics, tried—not very successfully—to formulate an “entropic” theory of economy and society, especially during the seventies.

The entropic view assumes that economic processes produce irreversible consequences because of their multiple interactions with nature. We draw from stocks of nonrenewable natural resources (for example, oil and metal ores), and we deteriorate or modify the quality of other resources (for example, water and arable land) by imposing on them a rhythm of exploitation superior to their capacity for regeneration. In fact, the exploitation of nonrenewable resources frees the speed of economic growth from that of ecological renewal, aggravating the deterioration of the biosphere, including irreversible climate changes.

The law of entropy reminds us that we will leave to future generations a degraded natural patrimony, probably less adequate to their needs than what we inherited. Unfortunately, there are no simple answers. For the sake of what principle can we ask China and India, for example, to limit their economic dynamism so that they use smaller amounts of the planet’s natural resources? After all, the advanced countries’ slower growth is not the consequence of voluntary self-limitation, but of our superior standard of living—and of our incapacity to settle our own economic imbalances.

We cannot impose an ecological rhythm on people who are poorer than we are when it is the very fact that we freed ourselves from that rhythm that made us richer. Economic contraction, or even stagnation, is not a solution for the developed countries, either, for a similar reason: it would imply that we either accept existing inequalities or impose a regime aiming at an equal redistribution of resources. That choice boils down to an unbearable cynicism or a totalitarian utopia.

But, happily for us, our evolution is determined not only by entropy, but also by the accumulation of knowledge and technological progress—a process that is just as irreversible as the decrease in stocks of nonrenewable resources and the degradation of environmental quality. Thus, the economy is entropic for resources and historical for the production, organization and spread of knowledge, with the prospects for economic and environmental sustainability residing in the space left between those two dynamic processes: the level of growth we choose must be conditioned on a sufficient level of knowledge to ensure the system’s survival.

Yet nature, like knowledge, is a public good that needs state intervention to be “produced” in sufficient quantities. The only way to overcome the finiteness of our world is to maintain as much space as possible between entropy and history by investing in education and research aimed at increasing renewable energies, reducing the energy intensity of our standards of living and slowing the pace of environmental erosion.

It is widely believed that such a strategy would be useless if the only effect is to allow others to get rich faster by opting out. But if that strategy is conceived as mastering two dynamic processes, overcoming the ecological constraint could be an accelerator of growth.

Jean-Paul Fitoussi is president, l’Observatoire Français des Con­jonctures Économiques, Paris.

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