Neoclassical Economics vs Ecological Economics

The most significant difference between neoclassical economics and ecological economics is the fundamental modeling of economics in relation to the planet’s ecosystem.  Neoclassical economics assumes we are in an Empty World, where the economics is only a small piece of the overall ecosystem picture.  Thus ecosystem is abstracted as an input output element.  In this neoclassical world, our actions are un-restrained by the ecosystem capacity simply because this element is not factored in.   Thus, the assumption is that we can grow indefinitely  In the ecological economics view, economics is contained within the ecosystem of the planet.  Thus the boundaries of the economy must remain within the boundaries of the ecosystem.  Physical laws of thermodynamics apply.  We can create matter; we have only what is available within the ecosystem.  In the Full World that we are in today, this view is more appropriate and realistic.

To take an example, let’s look at a cabin in the forest that needs to be heated.  The owner heats the cabin by chopping wood around the cabin.  Since the forest is very large, she is in an “Empty World” situation.  She has seemingly infinite amount of wood available.  Thus she does not need to calculate the wood renewal rate when she chops down wood for burning.  But then 300 more cabins are added to the forest.  Suddenly she is stuck in a “Full World” situation, and have to carefully manage the wood renewal rate with her neighbours, or face drastic decline in forest availability and quality of life.  Mankind used to be one cabin in the forest, but as our impact scales, we are outgrowing the forest, and must actively manage our resources or face irreversible depletion of these resources.

Daly H. & Farley J. (2004). Ecological Economics: Principles and Applications. Washington, DC