Increasingly, economics—the study of scarce resources and their alternative uses by the occupants of the "oikos" (the house)—is coming under attack. Paul Samuelson, one of its leading practitioners, said, "The malaise from which the mandarins of economics are suffering is not imaginary. It is genuine." 1 Samuelson and others believe that traditional economics cannot deal adequately with and explain the behavior of the economy. If that accusation is true with respect to national economies, it is indisputable with respect to the global economy.
Traditional criticism of conventional economics by economists themselves ranges from Karl Marx's hostile rejection of the capitalistic economic model to John Kenneth Galbraith's mild challenge of contemporary economic wisdom. Most of the self-criticism that has come from the contemporary economists' camp leaves the basic premises of economics intact. Thus, the basic circular flow diagram is still considered a good explanation of how an economy works, and government intervention is still considered to be an adequate tool for managing an economy—to correct temporary or cyclical excesses of productive capacity, production, or even demand, the government need only change fiscal and monetary policies.
Bioeconomics is a completely new approach that challenges the conventional economic framework. A major methodological development in economics, bioeconomics represents an amalgam of economic theory, biology, and physics, especially thermodynamics. The father of this new hybrid discipline is Nicholas Georgescu-Roegen, Distinguished Professor of Economics Emeritus at Vanderbilt University. 2 Bioeconomists challenge the basic premises upon which the entire edifice of economics is based. Bioeconomists have diverse educational backgrounds and political beliefs, but they all agree on the inadequacy of conventional economics and share a new vision of economics, which they consider superior in its conceptual elegance and practical usefulness. 3
Bioeconomists' challenge of the four pillars of conventional economic wisdom begins with rejection of the "fundamental illusion" that growth is the answer to all economic problems and its logical corollary that growth can go on forever in a more or less exponential fashion.
The second pillar of economics that is beginning to show signs of severe cracks, according to bioeconomists, is the idea that the scarcity of the natural resources currently used to create economic wealth is only a matter of price and for this reason constitutes no real problem.
The third pillar of conventional economic wisdom that is beginning to crumble is belief in the infiniteness of natural resources that can be used in productive processes. This belief is a corollary of the principle of unlimited substitutability—the idea that one can always substitute one product, resource, or process for another—which is the centerpiece of traditional economic analysis.
Finally, the fourth pillar of conventional economic science being challenged by bioeconomists is the idea that an economy can be modeled in a rather scientific fashion as a system of equations that will eventually reach an equilibrium no matter what. Bioeconomists dispute the notion that economics, an essentially "soft" science, can reach the status and the prestige enjoyed by the "hard" sciences, such as physics and chemistry.
Bioeconomics attempts to explain economic phenomena by going outside the discipline of economics into biology and thermodynamics. The basic propositions upon which bioeconomics rest are that (1) all resources are scarce (finite) and (2) matter as well as energy is subject to entropic degradation (the Second Law of Thermodynamics).
The first and perhaps the most widely known exposure of the inadequacies of conventional economics came from a group of concerned world citizens who formed the Club of Rome in 1968. Under the leadership of an Italian industrialist, Aurelio Peccei, the Club of Rome commissioned Jay Forrester, a professor from the Massachusetts Institute of Technology's Systems Dynamics group, to create a model of the world that could be used to alert the world's decision makers to the devastating effects that continuing industrial growth would have on the earth's carrying capacities.
The group produced a computerized model of the world as an interactive system with five main components: population, food production, industrial production, nonrenewable resources, and pollution. The group presented the results of many simulated runs of the system and concluded that in the finite system of the earth, exponential growth of population, food, and industrial production was an impossibility. The group reasoned that the physical system's life support capacities were growing at best linearly and as a result were imposing a limit on the exponential growth of the social systems of population, food, and industrial production. These limits to growth, the group asserted, were already visible in the area of energy production and energy use. The recommendation of the group is known as the "double zero solution": zero population growth (ZPG) and zero economic growth (ZEG).
The book that followed its initial presentation, The Limits to Growth, 4 earned for the Club of Rome the name Doomsday or Neo-Malthusian group. It spurred numerous responses both in the United States and abroad and was followed by many sequels by the Club itself as well as by others. In the United Kingdom a group of concerned scientists signed a document entitled Blueprint for Survival, which espoused the Club of Rome view and provided some practical advice on how to implement the Club's recommendations. 5 In the United States the Council on Environmental Quality presented to President Carter The Global 2000 Report to the President, verifying and endorsing the main views of the Club of Rome. 6
Herman Kahn and his Hudson Institute were the first to attack the Club of Rome both for its methodology and for its findings and recommendations. 7 Kahn's main contentions were that growth is good for everybody and that the argument that there are some natural limits to growth is nonsense. According to Kahn, the earth contains incredible amounts of resources which will last virtually forever. In addition, humans with their science and technology will continue to develop new and more efficient ways of doing things, so there is no reason to worry that growth will stop because of any limits on the "inputs" to the growth machine. Kahn did acknowledge, however, that there might indeed come a time when limits might develop on the demand, or output, side of the equation.
Julian Simon, a professor of economics at the University of Illinois, argued in Science magazine that all the talk about limits to growth and the deterioration of the world was a journalistic ploy to present only bad news. 8 Simon argued that the world is getting better and better and that population growth has positive effects on the well-being of everybody everywhere. In his book The Ultimate Resource, 9 Simon attempted to prove that rather than deleterious effects, the major economic consequences of population growth were augmentations of the stock of human knowledge. He also claimed that population growth is positively related to growth in per capita income.
Simon teamed up with Herman Kahn (who, as a physicist with knowledge of the physical aspects of the earth, could complete Simon's arguments on the positive impact of population growth) to refute The Global 2000 Report to the President. In their book, The Resourceful Earth, 10 they concluded, "If present trends continue the world in 2000 will be less crowded, less polluted, more stable ecologically, and less vulnerable to resource-supply disruption than the world we live in now." They also predicted "declining scarcity, lowering prices and increased wealth."
Regardless of who is right, the lesson for the international manager is that a study of international economics must nowadays take a holistic viewpoint, one that combines the physical as well as the economic aspects of an economy. As Michael Stewart, from University College in London, wrote in his book The Age of Interdependence,
The perception is that when governments make macroeconomic decisions they do so in a thoroughly myopic way. They look at the effects of their decisions on their own country, but not on the other countries. They look two or three years ahead, but no further. This limited horizon—both spatially and temporally—may once have been legitimate, but is so no longer. The world has become much more interdependent, and the decisions made by major industrial countries can have effects around the world. At the same time, man's activities have begun to have serious effect on the environment: decisions determined solely by the needs of the next few years can impose unwanted and irreversible constraints on future generations. 11
ISSUE FOR DISCUSSION
In its State of the World 1986, the Worldwatch Institute presented a list of the effects of the depletion of various resources on the global economy. 12 Discuss the implications for the world economy and for MNCs of the depletion of the six resources listed in Table 6.3.
|
Resource |
Extent of Depletion |
|---|---|
|
Forests |
World's tropical forests disappearing at 2 percent per year. Far faster in West Africa and southeast Asia, where moist tropical forests will have virtually disappeared by end of century. Previously stable forests in temperate zone now suffering from air pollution and acid rain. Dead and dying forests plainly visible in West Germany, Czechoslovakia, and Poland. |
|
Grasslands |
Excessive pressure on grasslands, closely paralleling growing pressure on forests and soils, has led to deterioration, which is most advanced in Africa and Middle East. Herd liquidation in pastoral economies of Africa now commonplace. |
|
Fisheries |
Rapid growth in world fish catch during fifties and sixties now history; overfishing often the rule, not the exception. Fish catch per person, including from fish farming, down 15 percent since 1970. Biggest consumption cuts in Third World countries such as Philippines. |
|
Soil |
Soil erosion exceeding new soil formation on 35 percent of world's cropland. World losing an estimated 7 percent of topsoil per decade. Effects most evident in Africa, where 40 percent of people live in countries where land productivity is lower than it was a generation ago. |
|
Water |
Growing water demand exceeding sustainable supplies in many locations, leading to scarcity. Falling water tables now found on every continent and in key food-producing regions. In some areas, including portions of the United States, water being shifted out of irrigated agriculture to satisfy growing residential demands. |
|
Oil |
Increases in the price of oil, the principal commercial fuel, sharply reduced world economic growth since 1973. Part of decline is due to ill-conceived responses to oil price hikes, notably the heavy borrowing by Third World countries. Progress in developing renewable alternatives is lagging. |
|
SOURCE: Brown et al., The State of the World 1986, p. 10. |
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