Syllabus Edition
First teaching 2024
First exams 2026
Alternative Economic Models (DP IB Environmental Systems & Societies (ESS))
Revision Note
Written by: Alistair Marjot
Reviewed by: Bridgette Barrett
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
Examiner Tips and Tricks
You do not need to be able to draw these diagram models for your exams. However, you do need to know what these circular flow of income models include and what they exclude, and the significance of these choices.
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