Economics of Sustainability

Economics of Sustainability






Economics of Sustainability


The degree of the problems recently besetting the natural resources and environment reflects the significant social economic progress attained in the 20th century. The increasing economic activities around the world have a significant impact on the environment, such as transport, energy, construction, industry and agriculture. These developments pose a genuine danger to the global environmental balance. The term sustainable development was created in 1987 by the United Nations Commission of Environment and Development. The term was coined to refer to the endurance of the human species and maintenance of the productivity of naturally, generated and human resources from one generation to the other. Sustainable development is progress that meets the requirements of the current generation without compromising the capability of future generations to satisfy their own necessities (Pezzey and Toman, 2002, p. 25).

Sustainable development has turned into one of the topics in contemporary economics. Over the past several years, the Club of Rome indicated the limitations of economic progress emanating from scarcity of natural resources and environmental destruction. Over the years, economic activities of western industrial nations have been to shun these limitations. These countries have strived to establish conditions that could ensure sustainable development in an ecological and economic sense. In the modern economics, the emergence of the term sustainable development has led to modifications in nearly each aspect of production and consumption patterns. The discussion of the concepts of sustainable development usually generates heated debates especially among the arguments of neoclassical economics and environmentalists. The paper seeks to discuss the basic, mainstream economics concepts agreeing or disagreeing with the core concepts of sustainability (Kant and Berry, 2005, p. 37).

Core Concepts of Sustainability

As Berg, 1996, p. 55 observes, there are three vital features of sustainable development; social sustainability, economic sustainability, and environmental sustainability. Environmental sustainability is described as maintenance of life supporting systems. An environmental, sustainable structure should maintain a constant resource base, shunning over exploitation of renewable resources and draining non-renewable resources simply to the level in which investment is made in sufficient substitutes. This entails maintenance of atmospheric stability, biodiversity, and other ecosystem functions, which are not customarily classified as economic resources. Economic stability is described as preservation of economic capital. This definition relies on the Hicksian description of income; the optimal amount of income, which may be spent with no reduction of the future real consumption.

An economic, sustainable structure should be capable of producing services and products on an enduring basis. Second it should be capable of maintaining manageable levels of external and internal debt. Third it should be capable of avoiding extreme imbalances between sectors, which harm industrial or agricultural production. Social sustainability is described as preservation of social capital. A socially sustainable structure should attain equality in opportunity and distribution, sufficient provision of social amenities, and political participation and accountability. Sustainable progress should incorporate the three kinds of sustainability and employ them and start making development sustainable (Ekins, 2000, p. 157).

Sustainability Models: Sustaining Capital Stock

As Daly, 2008, p. 62, notes, natural resources such as natural gas, oil, minerals, and coal are examples of resources, which are naturally subject to exhaustion. If the current rate of consumption of these resources continues, a situation will arise where these resources will be unavailable. However, inventions and technological advances can delay the exhaustion of these resources. Sustainable development is necessary to facilitate the substitute of services and products generated from non-renewable resources with services and products generated from renewable resources. Sustainable development is essential to diminish input of the environment and natural resources per unit of output. This means greater dependence reproducible capital; human made capital and human capital (knowledge).

Reproducible capital requires resources to build. Reproducible capital may diminish society’s dependence on natural resources through augmenting the effectiveness of every unit of service or product offered by renewable and non-renewable stocks. Neoclassical economics concepts agree that technological advancements, prices, innovations and inventions play a role in sustainability development. There are two perspectives that may be referred to as the neoclassical and the ecological paradigms or weak and strong sustainability, respectively. Various studies provide many reasons for favoring strong sustainability. First, various innate resources are vital for production, and their exhaustion would constitute a disastrous situation. Second, sustainability diminishes as a result of exhaustion of the capital stock (Daly, 2008, p. 65).

Lastly, the studies squabble that there are no replacements for various natural resources. This means that vital natural resources should be preserved in spite of the opportunity cost associated with such action. The ecological perspective downplays the role of technological change and prices in sustainability development. Prices are deemed to be imperfect indicators of the scarcity of resources as a result of market imperfections. The studies argue that prices do not represent the interests of upcoming generations, and since they reveal conditions at the edge, they cannot be employed to value total reserves of the resources. Prices cannot be depended upon, to indicate scarcity since owners of resources may have two optimistic outlooks on technological change (Hackett and Moore, 2011, p. 298).

Resource owners will persist to provide limited innate resources even as shortage augments for the worry that technological changes will lower future prices. The time horizon of private resource holders causes a lot of natural resources to be provided, therefore, depressing prices. As Hussein, 2008, p. 270 observes, the ecological perspective is pessimistic concerning the future role of technological advancement. According to this perspective technological change is deemed to be uncertain to depend on for resolving environmental problems. In terms of maintenance, the ecological view is that capital should be maintained separately as reproducible and natural capital and not as aggregate capital.

According to neoclassical economists view, suppliers of natural resources rely on the market conditions in the determination of prices. Technological changes lower the costs of production emanating from improvement of production processes and competition. In turn, this leads to reduction of prices of commodities in the market. In order to prevent their profit margins, suppliers of natural resources will regulate the amount of supply in the markets. This creates a shortage in the market leading to high prices. However, if there are different private resources holders in different regions, their supply may not change, thereby, reducing prices in the event of technological changes (Soderbaum, 2012, p.54).

As observed by Soderbaum, 2012, p.599, the second viewpoint regarding sustainability is the weak sustainability also known as the neoclassical model. The neoclassical model is the converse of the ecological outlook that natural resources imposes stern limitations on growth and an ecosystem collapse would result to economic collapse. The viewpoint of the neoclassical is that as capital become scarce, their comparative prices will increase, which results to maintenance and replacement towards alternative capital and the development and utilization of new technologies. Increasing comparative prices cause replacement away from the capital, which is becoming scarce. The neoclassical argues that this is what took place in the past and continues today.

The neoclassical point out that the elasticity of substitution between natural resources and reproducible capital is high. Neoclassical economists indicate that there are two likelihoods of sustaining growth. First, there is probable adequate substitutability between renewable capital and non-renewable capital in which economic development may be sustained while producing an incessant decline in the non-renewable capital stock. In the case of oil resources, this argument will be accurate if economies become more dependent on public transportation or individuals purchase only the most fuel efficient automobiles (Maples, 2005, p. 100). Second, technical change will inexorably enable society to move from dependence on one non-renewable resource to another. For example, previously trains used coal and later converted to oil. Currently there are trains, for example, in Belgium, which are using solar energy a renewable resource (Rogers and Boyd, 2012, p.62).

Economists do not deny that, it is complicated to measure precisely how past technological change has influenced, the elasticity of replacement between renewable and natural capital. However, economists agree that technological advancement has made an impact on the three aspects of sustainable development. As a result, economists are optimistic regarding the potential for technical change in the future. The neoclassical economists’ outlook on sustainability of capital stock pertains to the flow of returns from capital. The goal is to maximize the annual revenue, which may be generated from the natural capital over the entire remaining period (Sterling, 2012, p. 180).

Net income from a non-renewable resource ought to be allocated into a capital component and an income component. The capital constituent is to be saved and invested at the actual rate of discount. The amount of income allotted to the capital constituent as opposed income constituent is determined as follows. After the depletion of the natural resource, the capital constituent will require to generate yearly revenue in perpetuity, which is equivalent to the revenue generated during the period when the mine was in operation. The implicit supposition is that renewable and non-renewable resources are infinitely substitutable. This implies that the economy will not collapse as a result of exhaustion of the natural resources (Sterling, 2012, p. 185).12

Neoclassical describes sustainability in terms of welfare maximization over time. Various economists simplify this concept through recognizing welfare maximization with optimization of satisfaction derived from consumption. As per standard economic hypothesis, efficient resource allocation ought to have the effect of optimizing utility from consumption. If time discounting method is employed in comparing the financial values of consumption in diverse periods, then sustainability may mean efficient resource allocation. The use of discount rate imposes a specific alternative concerning the relative wellbeing of current and future generations. Studies have shown that the selection of a rate of discount is equivalent to a selection of allocations amongst generations (Gechev, 2005, p. 69).

Use of the prevailing market rate of discount provides excessive credence to the preferences of the present consumers. If issues such as greenhouse gases emissions and soil erosion are considered, this creates a sturdy bias against sustainability. The bias arises from the reality that most of the ecological degradation impacts such as greenhouse emissions and soil erosion are felt by future generations. Economists, therefore, argues that to attain intergenerational fairness, an economy should impose a low rate of discount or a form of sustainability regulation concerning resource utilization and environmental impacts. This implies that both the neoclassical and ecological views regarding sustainability agree on the need of adopting strategies, which will ensure sustainable development (Sustainable Measures, 2010).

The above discussion shows that, strong and weak sustainability are explained in stipulations of whether natural and reproducible resources are to be reserved separately (strong sustainability) or intact together (weak sustainability). Weak sustainability necessitates a high level of substitutability between natural and reproducible resources, while strong sustainability supposes that these forms of capital are complements instead of substitutes in various production functions. Neoclassical economists argue that, provided that natural resources, which are being depleted, are substituted with more valuable human made resources, and then the value of aggregate capital stock is augmenting over time. This aggregate capital stock comprises of both the remaining natural resources and human made capital (Gechev, 2005, p. 72).

Strong sustainability emphasizes that there are restrictions to substitutability between reproducible and natural resources. However, strong sustainability proposes that it is complicated to guarantee maintenance of future economic opportunities without enforcing some restrictions on the exhaustion of natural resources. Various strategies aimed at reducing environmental degradation involve the use of prices and technological change. For example, carbon tax is a form of direct levy imposed on the content of carbon found in fossil fuels. Imposition of carbon tax leads to high prices of products produced using fossil fuels. The tax is an economically efficient way of conveying vital price signal, which encourage carbon reducing investment. This facilitates innovations of the production processes, leading to improvement of production processes and efficient allocation of resources (Hill and Terry, 2006, p.298).


Sustainable development is the development, which does not undermine or devastate the social, ecological and economic basis on which sustained development relies. There are three fundamental concepts of sustainability; social sustainability, environmental sustainability, and economic sustainability. There are two sustainability perspectives; ecological perspective and neoclassical perspective. The two principles are also referred to as strong sustainability and weak sustainability. These two perspectives have different arguments regarding sustainability, although there are various complementing arguments. Weak sustainability necessitates a high level of substitutability between natural and reproducible resources, while strong sustainability supposes that these forms of capital are complements instead of substitutes in various production functions.

Policy Recommendations

Various economies derive their sustainable development policies and problems from Agenda 21, which was espoused by over 178 countries at the UNCED (United Nations Conference on Environment and Development), which was held in Brazil, in 1992. Agenda 21 provides programs and policies to attain sustainable equilibrium between population, consumption and the environment (United Nations, 2009). The developing economies need to eliminate poverty through providing poor individuals more access to the capital they want to survive sustainably. This will reduce the environmental degradation emanating from poverty, for example, deforestation in most developing countries. Carbon trading needs to be facilitated to ensure that developed countries play a more significant role in preserving the environment. Developed nations should provide funding and capacity to plan and implement sustainable development resolutions. This will facilitate the transfer of skills and information regarding environmental conservation. All governments should espouse national plans for sustainable growth. For example, North America has adopted policies to reduce greenhouse gases emissions such as cap and trade and carbon tax policies. Belgium is another country, which is generating solar energy to run their locomotives.


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