Alternative Economic Models (DP IB Environmental Systems & Societies (ESS))

Sustainable Economic Models

Ecological economics

• Ecological economics supports the idea of degrowth, zero growth, or slow growth

  • This means reducing how much we consume and produce, especially in wealthy countries

• The goal of ecological economics is to balance the ecological footprint of a country with its biocapacity

  • This balance leads to sustainability, where we don't harm the environment at a faster rate than it can recover, or remove resources faster than they can regenerate and be replaced

Challenges and solutions

• It's not easy to change long-standing and deeply embedded economic systems

  • Ecological economists are constantly working on finding ways to measure social and environmental well-being accurately

• They focus less on GDP (gross domestic product), which only measures economic activity, and instead focus more on sustainable balance (i.e. the extent to which the ecological footprint of a country is sustainably balanced by its biocapacity)

  • For example, instead of just looking at how much a country, industry or business produces, they also consider how much this economic output is harming the environment

• This means looking at how much a country consumes compared to the capacity of its natural resources to regenerate

  • For example, if a country's biocapacity (how much it can renew resources) is lower than its ecological footprint (how much it consumes), it is not sustainable

Circular Economy & Doughnut Economics

• The circular economy and doughnut economics are two different economic systems

• Both the circular economy and doughnut economics models are based around the principles of ecological economics

  • They aim to increase sustainability by addressing environmental and social challenges within economic systems

• While the circular economy emphasises the efficient use of resources through product stewardship, doughnut economics considers how much economic activity can happen without permanently damaging the planet or causing social problems

Circular economy

• Currently, most resources are part of a linear system where:

  • Finite resources are used to make products

  • The products are used

  • At the end of their lifecycle, the products are thrown away

• This leads to increasing amounts of waste

• Recycling is considered to be the first step towards the ambitious goal of a ‘circular’ economy

• The circular economy is an economic system designed to minimise waste production and resource depletion by promoting the reuse, repair and recycling of products

  • It promotes product stewardship, which means that the responsibility for the sustainable management of a product lies with the manufacturer, seller, and user of that product

  • This includes considerations such as product design, manufacturing, use and disposal, with the aim of promoting sustainability and reducing environmental harm

• By extending the lifespan of products and materials, the circular economy aims to reduce environmental impact and create a more sustainable system of consumption and production

  • For example, companies like IKEA have implemented furniture leasing schemes to encourage reuse and minimise waste generation, contributing to the circular economy mindset

    • Furniture leasing schemes involve renting furniture instead of purchasing it outright

    • Customers pay a periodic fee to use the furniture for a specified period, after which they may return it or renew the lease

    • This model promotes resource conservation by extending the lifespan of furniture and reducing waste generation

• Within the circular economy, there are two cycles:

  • The biological cycle is where the biodegradable products are returned to the natural environment

  • The technical cycle where products are recycled, reused, repaired or remanufactured

Doughnut economics

• Doughnut economics provides a framework for ensuring that economic activity remains within the ecological limits of the planet whilst attempting to address social inequality and injustice at the same time

  • The model visualises a "doughnut" shape (a ring with a hole in the middle of it), representing the space between planetary boundaries (environmental constraints) and social foundations (basic human needs)

  • This has been described as a "safe and just space for humanity" (Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist, Kate Raworth)

  • By aiming to operate within this space, the doughnut economics model seeks to achieve sustainable development that meets the needs of both present and future generations

    • For example, cities like Amsterdam have adopted the doughnut model to guide policymaking, prioritising environmental sustainability and social equity in urban development plans

Other economic models

Circular flow model

• This model should not be confused with the circular economy system

• This circular flow model is either studied using:

  • The two-sector model (isolated model)

  • The five-sector model (open model)

• Two-sector circular flow model:

  • Income (Y)—wages, rent, dividends and profit

  • Resources—factors of production

  • Output (O)—goods and services

  • Expenditure (E)—consumer spending

  • There are only two economic agents/actors—“households” and “firms”

  • The system boundary is drawn very tightly around the main agents/actors—households and firms only

  • Households provide “resources” (factors of production) to firms, most notably labour

  • In return, households receive “income” from firms

  • Firms use the resources to create goods and services (output)

  • Households spend money (“expenditure”) to buy these goods and services

• Five-sector circular flow model:

  • Three additional economic agents/actors are included: “financial sector” (firms such as banks), “government sector” and the “overseas sector” (international trade or foreign firms)

  • Each of these three additional sectors either provide money to (“injections”) or receive money from (“leakages”) the core exchange between households and firms

  • For example, both households and firms pay taxes to the government (leakage), but the government also spends money in the core economy (injection).

• These traditional economic models visualise economic activity as a closed system of resource and product creation, and financial exchanges between households and businesses

• However, these models often overlook the role of nature in economic processes, presenting an over-simplified view of the economy that does not take into account how dependent these economic processes are on the environment

  • In other words, these models see economic activity as separate from the natural world, i.e. nature is invisible in these models

  • This human-nature dualism has historically played a large role in the overexploitation and degradation of the natural environment

Embedded economy model

• In contrast to the isolated two-sector model, socio-ecological economics uses a more open model of the economy

• The embedded economy model (proposed by ecological economist Herman Daly in the 1970s) acknowledges the interconnectedness of the economy, society and the environment

  • The model shows the input of solar energy and material resources, as well as heat loss and waste into Earth’s sinks

• It recognises that economic activity is embedded within and dependent upon the natural environment, with inputs from nature and societal contributions, such as unpaid care work, playing integral roles

  • In other words, the economy is “contained" within society and within nature

• This model provides a more complex but more complete understanding of the economy's relationship with society and the environment, highlighting the need for sustainable resource management and social equity