Anastasia Hendren

Sustainable Economics
April 14, 2017
Analytical Reflection on Hall & Klitgaard
Neoclassical Economics
Neoclassical economics is an economic approach that explains the consumption, distribution,
and production of goods and services using the market forces of demand and supply (Morgan 18-
21). Its research domain is rooted in the interpretation of the behavior of firms and the individual,
and their forces on supply and demand in the market place. This approach towards economics
combines the classical thought that the value of the commodity which is determined by the cost
of production, and the keynesian value on the commodity that is determined by its utility to the
consumer. This can be broken into premises that predict market behavior according to
neoclassical economic theorists. There are many core premises that define neoclassical
economics, however the ways in which they were implemented into our current economy make it
difficult for sustainable practices to thrive. (Morgan 48-56).
- The scarcity of resources. The steady increase in population has negatively impacted our
natural resources. Exploitation of resources has increased as people try to create commodities to
satisfy their needs. While we continue to use these resources and begin to truly see how scarce
they are, a sense of higher efficiency comes into economic play. By being more efficient, there is
an underlying hypothetical competition between who and what is more efficient. This
competition is the driving force for how markets self-regulate themselves, forcing companies
that are inefficient to fail and leave the market. Overtime, through efficient practices comes
about new technological advances to combat the issues associated with our depleted resources,
such as global climate change, deforestation, and acidification of the ocean (Hall and Klitgaard
98).
Neoclassical practices have had great outcomes for most of society; goods, services, jobs,
and competition within markets. Yet, it is detrimental to the health of our planet in almost every
way. It is not sustainable for our economy to be using every last drop of our natural resources for
economic gain and wealth. This goes against all sustainable thought and practices, we could and
should be focusing our current assets into development and implementation of renewable energy.

- Rational Choice. Man in his endeavor to increase utility now engages in a cost-benefit analysis
along with informed decision making processes. This means that the choices one makes are not
influenced by any external forces, legislations and or societal purchasing customs. This premise
assumes that the buyer always makes a rational decisions when purchasing. These purchasing
decisions affect which goods and services are dominant in each industry. Firms believe that in
order to make the maximum profit they need to reduce the costs of production. (Hall and
Klitgaard 104-105??). This rational choice is important because by having well informed
consumers in the marketplace, they in turn regulate the practices of each industry, sustainable or
not. The instrumental rationality at these microeconomic levels predict behavior and therefore
help the market to move to a static and stable position.
This hypothetical rational thought amongst all individual consumers will allegedly lead
to stable markets, and ideal market practices which can greatly benefit society through
appropriate supply and demand of goods and services. This impact can be seen in many areas of
business and everyday life. Stable markets provide individuals with positive or negative
feedback about their economic utility and reassures their faith in the success of their economy.
However this premise of rational thought fails to extend to our natural capital allocative
efficiency. Our current economic practices show that the benefits to sustainable purchasing are
not known to the average rational consumer. Neoclassical economics also predicts that if an
individual is rational, they are also well informed, being that all decisions made will be rational,
well informed decisions. For example, when someone learns of the true costs of pesticide use on
non-organic farms, they will tend shift their dollar and purchasing power to organic farms,
thereby stabilizing the role of nature in that area of business.
- Infinite Substitutability. This premise asserts that all elements and companies associated with
goods and services can be endlessly replaced by other similar elements and companies. This
means that there are limitless resources from which society can pull. We as a society have never
truly needed to live within limits. Our neoclassical economic system has done its job quite well,
seeing that it has brought about immense wealth and opportunities to both firms and individuals.
However, to live within natures limits, we need to arrive at the conditions of strong
sustainability, which requires that the profits from the depletion of a resource or degradation of
an ecosystem are reinvested in developing alternatives or restoring degraded systems (Hall and
Klitgaard 141). If we can become a strong sustainable economy, living within natures limits
wont really be limiting to our society. These limits are simply in place so that we do not exploit
nature, again, to the point of permanent damage. By shifting society this way, we can still live
our pleasant, modern life, but we will do so with consciousness and mindfulness.
- True Value v. Utility Value. These are the ways in which we can measure the perceived value
of the good in the market, regardless of its real value to the individual. Conflicting interests
within societal values changes the true cost of the product and the societal value of the product.
This means that a community places a higher prestige on products that are actually less valuable
to the actual vital needs of the consumer. For example, the cost of water is low considering that it
is a necessity to sustain life. While diamonds and other exclusive amenities simply provide
communal gain amongst peers. From the viewpoint of sustainability, long term products such as
solar panels show that they have a true value and a utility value. They have integrated into our
dominant social paradigm as a trendy feature to any home and are beneficial over extended time.
The marrying of these two very different concepts shows how we can motivate sustainable
change in our populace.
- Free Market. This premise poises that there is equal competition in any market and that the
market is unimpeded by barriers to entry, consumer preference or governmental influence. This
premise is managed by cost benefit analysis to optimize efficiency. Economies based on this
model operate falsely on the assertion that laissez-faire policies will support equal opportunities
for all parties involved. Neoclassical theory asserts that market pressures from consumers to
suppliers for reduction in prices, will force survival in competitive environments. Ideally, this
structure will lead to effective use of the available factors of production that cannot be brought
together to guarantee fair competition. Belief in perfect competition highlights the real barriers to
entry in the market that sustainable companies are currently lacking. There is no government
interference that could provide assistance to emerging markets. This barrier to entry would be
helpful. It must be noted that while neoclassical theory does not give a clear distinction of market
interference, it states clearly that the objective role of economics is the creation of wealth,
through a vicious plunder of the environments endless resources. This is a huge barrier to
fostering sustainable behaviors in business practices.

Neoclassical economics over the past 130 years, has done its job of creating wealth and pushing
societies to a higher level of production and consumerism. In reality, our economy has done quite
well for itself over the years following the above premises, yet this system cannot be a
continuous or reliable system. This is clear when looking at the socio-ecological impacts of our
neoclassical system. As a whole, our economy does not take nature or energy into account
whatsoever. We currently see these elements of life to be of infinite surplus, when we know they
are finite. In coming years, if we do not shift our economic focus from profit and self gain to true
sustainability, nature will be damaged beyond repair. Once we degrade nature to that point,
society's will being to fail and fall apart. We must regain the connection of how important nature
is to keep our human world properly functioning. We are in need of a complete overhaul of our
economic system (Hall and Klitgaard vii).
Biophysical Economics
This is a modern economic approach that draws attention to how the biosphere provides
our wealth, how much we transform energy for production, and to the consumption of energy as
the point of departure for economic development (Hall and Klitgaard 203). The proponents of
this theory draw focus to an entire new thought of economics to include our planet and the
energy we obtain from it. They posit that development is directly proportional to the exploitation
of energy, and that where population increase is linear to the consumption of energy,
development is a clear consequence (Hall and Klitgaard 199).
There are three core issues that biophysical economics seek to address:
1. When our modern economy does not factor in the current
economic crisis to either predict, prevent, or mitigate climate change and resource
depletion, it is time for an overhaul and different viewpoint of understanding the
economy.
2. The capture of excess energy is the main driving force of all life, in
the natural and economic world.
3. We cannot process more material that is contained in the entirety of
the biosphere.

- The first premise is the driving force of biophysical economics. Over the past 130 years, we
have been living in the neoclassical economic world, and with the advancement of natural
sciences we are now comprehensively understanding how our economic structure is irreparably
damaging our Earth. Now that we understand how our planet is handling current economics, we
see the need for a new system. We are in the times of needing an all-inclusive approach to future
economics. One that includes nature as the means of our wealth, how and where our energy
comes from and goes to, and includes proper societal function of both developed and developing
nations (Hall and Klitgaard 8).
The societal implication of the current economic system on a worldly scale, is that when
developed nations make the gain on production and real returns on the exploitation of energy,
there is a considerable decrease in the gain for developing countries (Hall and Klitgaard 204).
The developed countries then poorly try to accommodate developing countries to further
develop. This they do by offering loans. These loans create more problems for sustainability, in
that, when developing countries keep on borrowing, the debt deficits increase to amounts that are
difficult to offset. Yet, in a biophysical system the proper payment of labor to developing
countries would be a must, along with necessary payments for extracting natural resources from
the earth. When this is accomplished sustainability will be stronger in our world more than ever.

- The second premise for biophysical economics states that the capture of excess energy is the
driving force for all life, in the natural and economic world. For at least 98% of the millions of
years that we have been recognizable humans the principal technology by which we as humans
have fed ourselves has been that of hunting and gathering (Hall and Klitgaard 245). This met
our required energy needs at the time, yet as we continued to evolve with the world around us we
learned how to capture energy. Through agriculture capturing solar energy to innovations on
wind and water energy, we slowly paved the path to the finding and using of fossil fuels. All of
this captured energy allowed humans to grows in means of governments, militaries, arts, and
civilization. The one main point that we have been missing this whole time is how much energy
can we actually store from our beloved fossil fuels. Our time with fossil fuels now has a timer on
it, and if we are to continue to capture energy from the planet we need to do so in a sustainable
manner.
Sustainably speaking solar, wind, and water energy are the ways of the future. These
means of infinite energy are what is going to keep our economies from complete failure once
fossil fuels are no longer viable for usage. When this switch to renewable energy happens, the
socio-ecological implications will be huge. Developing nations will simply skip over the fossil
fuel area straight into sustainable energy to promote healthy growth in those countries. They will
then have their own means of producing jobs for their citizens that will be helping keep our
planet sustainable rather than depleting it. As for already developed nations, the implementation
of renewable energy will shift jobs from that of fossil fuels to renewables. These nations will still
have jobs for their citizens, if not more, and they will no longer be contributing to climate
change.

- The last premise for the new biophysical economic system is the fact that we simply cannot
produce more than what is held within the entirety of our biosphere. After analyzing neoclassical
economics, the main finding was development and production led to growth, yet it didnt address
the materials, along with energy, needed for this growth. In the biophysical model, it is known
that materials needed for development come straight from our planet. Being that we know the
earth is a finite planet, there is no way that our economies can have infinite development and
growth. Biophysical economics states that we have reached a point where growth can be no
more, due to the limits of nature we live in. Many economists believe that new innovations and
technologies will help remediate our current environmental problems. Humans are indeed
industrious and ingenious, but that industriousness and ingenuity still require the Earth itself to
provide the raw materials and fuels that are the basis for most wealth production and the capacity
to absorb our wastes (Hall and Klitgaard 34).
Biophysical economics will call on the industriousness and ingenuity of humans to develop our
future under the laws of sustainability. The definition of sustainability that biophysical
economics follows is, to be sustainable, an economy must live indefinitely within natures
limits (Hall and Klitgaard 35). This clearly states that we must abide by the physical laws that
govern our planet, and must learn to live within its means if our species is to survive.
In the realm of the biophysical economic system, societies will still be profitable and successful.
Yet, exponential growth will no longer be an aspect of societies. With healthier policies guiding
 societies to the sustainable path, nature will be a top priority to all. Then, we can begin the
process of restoring our planet to a healthy, functioning state. Main areas of focus need to be on
the atmosphere and oceans so that they may once again handle human life and our waste.
After thorough analysis of both the neoclassical and biophysical economic systems, the
biophysical system is the best platform for a sustainable economy. This is so seeing that our
current economic system has failed our environment and world societies. Its basis of exponential
growth and development are not realistic goals for humans to be achieving. Our world is not one
of exponential resources and space, but rather one of finite capabilities. As inhabitants of this
planet, we should know that there are limits to being a successful species. If we continue to
exploit the biosphere, we will make it uninhabitable for not only us, but many other species as
well.

Work Cited
Morgan, Jamie. What Is Neoclassical Economics?: Debating the Origins, Meaning and Significance.
Routledge, 2015. Print.

Hall, Charles, and Kent Klitgaard. Energy and the Wealth of Nations: Understanding the Biophysical
Economy. Springer New York, 2011. Print.