The Environment: A Challenge for Economic Theory and Policy

By Ruffolo, Giorgio | Atlantic Economic Journal, September 1991 | Go to article overview

The Environment: A Challenge for Economic Theory and Policy


Ruffolo, Giorgio, Atlantic Economic Journal


The Environment: A Challenge for Economic Theory and Policy

This paper analyzes an issue which is becoming increasingly critical: the problem of the relationship between political economy and environmental policy. One can approach this theme by referring to a representation of the productive process which has been circulating for a long time in economic analysis and debate. This is the representation which sees production as a process which goes from some primary factors of production to the final output--transforming the former into the latter.

What is remarkable about this representation is how it has undergone -- and survived -- deep changes of attitude towards the inner meaning of the economic process and changes of opinion as to the nature, and relevance, of the factors of production involved.

Land and labor were pointed to as the primary factors of production by William Petty, in the first half of the seventeenth century, in an early attempt to give a characterization of the economic process of production. In the following century, capital (money capital or, more aptly, physical capital) was added to land and labor, by the physiocrats, and by Smith and the economists of the classical period. A triad was thus formed, which dominated a long span of the development of economic thinking: land, labor, and capital were the pillars of production -- albeit in a varying order of importance and with varying mutual relationships.

In the following period, however, land has tended to disappear from sight, as the economists' interests and apprehensions concentrated almost exclusively on capital and labor.

After World War II, and well into the 1960s and 1970s, debates about growth in industrial countries and development elsewhere have virtually been done without taking into account land and its services. Labor, or capital, or both together, were seen as the determining factors of production, those whose availability (in terms of quantity and quality) constrains economic possibilities and performances.

In a sense, the idea of (natural) scarcity was lost -- displaced by the (often only implicit) belief that man-made economic activity could overcome any physical limit.

The environmental crises of the recent years, increasingly severe and far reaching, represent a powerful reminder of the crucial role of land as a productive factor -- and a precious and endangered asset. Land will not only have to be understood in the narrow sense of agricultural and urban land, apt to be cultivated or built upon -- it will have to be seen as the much wider stock of natural and environmental resources which are used in economic activity.

Indeed, it is overuse of, or one should say abuse of, natural and environmental resources that we find at the origin of environmental problems and crises.

Plenty of examples of this can be given. The atmosphere is overcharged with emissions of damaging substances, and phenomena result which go from local pollution, to international transmission of pollution (as in the case of acid rain), to global threats such as global warming and depletion of the ozone layer. A sea, or a river, is overburdened with discharges, and the quality of both the medium and its services are diminished. A sea is overfished, and the stock of fish and its regenerative capacity are damaged. A garden, or a park, is subjected to overcrowding, and enjoyment and the condition itself of the garden or the park are negatively affected.

Economic analysis has developed, mainly through welfare economics, effective instruments to deal with market failures such as public goods and externalities. The environment is an externality not only with respect to the market, and thus requiring redistributive measures; it is an externality with respect to the economic and productive system as a whole, as natural resources are finite. The economic system has ignored the existence of limits to depletion and pollution, and this has given rise, in the last few decades, to irreversible ecological threats. …

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