LYY Institute seminar: Role of economics in environmental and natural resources policy
27 March 2014, University of Eastern Finland, Joensuu Campus
Economics and ecology are almost alike, but do they neglect one another
in research on natural resources?
Olli Tahvonen (D. Sc. Econ.)
Department of Forest Sciences, University of Helsinki
1 Some similarities between ecology and economics
2 Toward interdisciplinary setup in research on natural resources
Examples: reindeers, trees
3 Problems in interdisciplinary research
Examples: 1. Forest sciences 2. Begon et al. and "basic lack of trust"
Scientific imperialism –troll
Neoclassical economics –troll
Sociobiology –troll
On similarities
Economics
Ecology
Thomas
Malthus
(1766-1834)
Charles
Darwin
(1809-1882)
Malthus borrowed from nature
"the laws of natural increase in the
animal vegetable kingdom"
and forecasted a dismal economic
future to mankind
Darwin read Malthus’ essay and
received some useful ideas for
developing the theory of natural
selection
A Marshall (1842-1924)
‘In economics biological
analogies will displace
mechanical analogies’
In ecology the exponential
and density dependent growth models
originate from Malthus
250
200
150
100
Population size
JM. Keynes (1883-1946)
‘Darwinian theory is a
vast generalization of
Ricardian economies’
50
0
0
50
100
150
Time
200
250
On similarities
Economics
Ecology
Theory of rational choice,
consumer utility maximization
Optimal foraging behaviour of
animals, fitness maximization
Model for production and
profit maximizing firm
Resource allocation and optimization
models for plants
Optimal investments,
optimal growth, interest
rate, discounting, dynamic
optimization, trade offs
Models for optimal life history
strategies, reproduction value,
discounting, dynamic
optimization, trade offs
Game theory and interaction
of strategically behaving
actors; individuals, firms,
nations,..
Evolutionary game theory
animals, trees, genes,...
On similarities
Economics
"Tragedy of the commons"
humans
Concepts: n-person prisoner's dilemma ,
cheating, punishment, externalities,
common property resources,
public goods, free riding,...
Examples:
- enclosure (UK 1500-1900)
- all environmental problems
-congestion,...
Ecology
"Tragedy of the commons"
non-humans
Concepts: n-person prisoner's dilemma,
cheating, punishment, collapsing tragedy,
component tragedy, social goods,...
Examples:
- resource competition
- parent-offspring conflicts
- sexual conflicts
- tall plant populations
- virulence of parasites
Economics
Production activities overexploiting atmosphere
Ecology
Virus phages overexploiting
a host bacteria
On similarities
Economics
"Tragedy of the commons"
humans
Concepts: n-person prisoner's dilemma ,
cheating, punishment, externalities,
common property resources,
public goods, free riding,...
Ecology
"Tragedy of the commons"
non-humans
Concepts: n-person prisoner's dilemma,
cheating, punishment, collapsing tragedy,
component tragedy, social goods,...
Examples:
- enclosure (UK 1500-1900)
- all environmental problems
-congestion,...
Examples:
- resource competition
- parent-offspring conflicts
- sexual conflicts
- tall plant populations
- virulence of parasites
Solutions:
- taxes,
-market for permits, quotas (EU)
- social pressure, punishment
- privatization
-individual morality
Solutions:
- kin (group) selection
- punishment (e.g. ants, bees)
- "parliament of the genes"
- diminishing returns
On similarities
Ecology
Resource economics
Predator-prey dynamics
Fisherman-fish open-access dynamics
Lotka Volterra 1910 , 1920
Smith Wilen 1968,1976
dx
dt
F x
dE
qEx,
dt
kE pqx c
dx
dt
x
y ,
dy
dt
y
x
Similarities between ecology and economics
Harvesting of biological renewable resources
Ecology: dynamic pool fishery model
Environmental variables
and energy resources
Biological population
Recruitment
Growth of Individuals
Aging
Mortality
Other
populations,
spatial
structure
Mortality by predators
explained e.g. by
optimal foraging theory
Mortality by humans (another predator)
specified by
Maximum Sustainable Yield objective
(or a variant)
Harvesting of biological renewable resources
Economics of fisheries
Market structure, demand,
other investment possibilities
Fisherman or fishing firm
Objective: max the present value of
profit
Factors of production,
labour, man made capital,...
Natural resource (capital stock)
described by a dynamic biomass model
Other harvesters, Institutional setup:
open access, sole owner,
common property, government control
Ecology: dynamic pool fishery model
Environmental variables
and energy resources
Biological population
Recruitment
Growth of Individuals
Aging
Mortality
Other
populations,
spatial
structure
Mortality by predators
explained e.g. by
optimal foraging theory
Mortality by humans (another predator)
explained by
Maximum Sustainable Yield objective
(or a variant)
Harvesting of biological renewable resources
Economics of fisheries
Interdisciplinary setup
Market structure, demand,
other investment possibilities
Ecology: dynamic pool model
Other harvesters, Institutions: open
access, sole owner, common
property, government control
Fisherman or fishing firm
Objective: max the present value of
profit
Factors of production,
labour, man made capital,...
Natural resource (capital stock)
described by a dynamic biomass model
Other harvesters, Institutional setup:
open access, sole owner,
common property, government control
Environmental variables
and energy resources
Biological population
Recruitment
Growth of Individuals
Aging
Mortality
Other
populations,
spatial
structure
Mortality by predators
explained e.g. by
optimal foraging theory
Mortality by humans (another predator)
explained by
Maximum Sustainable Yield objective
(or a variant)
Interdisciplinary setup
Market structure, demand,
other investment possibilities
Other harvesters, Institutions: open
access, sole owner, common
property, government control
Fisherman or fishing firm
Objective: max the present value of
profit
Factors of production,
labour, man made capital,...
Pros
1 Gives reasonable picture on resource use – that is
fundamentally an interdisciplinary issue
2 Similar theoretical structure and math methods
can be used for various resources (fish, trees,...)
3 Enables to use existing ecological data
4 Economic optimization may reveal inconsistencies
in ecological models
5 Economic results become more understandable
and practically relevant
Environmental variables
and energy resources
Biological population
Recruitment
Growth of Individuals
Aging
Mortality
Other
populations,
spatial
structure
Mortality by predators
explained e.g. by
optimal foraging theory
Cons
1 Models become more complex
2 Economists become suspicious:
"This is not anymore economics",
"This does not change anything
that is economically essential"
3 Ecologists become suspicious:
"Is it sure that fisherman
optimize something? Hardly ever"
Examples of interdisciplinary research
1. Optimal harvesting of an age-structured, two-sex herbivore-plant system
Tahvonen, Kumpula, Pekkarinen (2013) Ecological Modelling
-The study develops a two sex age-structured ecological model for reindeer population
-The ecological model is integrated with economic description of reindeer herding
-Mathematical optimization is used for developing a management strategy that yields
highest possible (long run) income for the reindeer cooperative
-No previous optimization models with sex and age structure and dynamic energy source exist
Some results:
-optimal lichen biomass (in lichen pastures) is about 1200kg per ha (vs. present biomass ~500kg)
-optimal population density about 0.3 animal per lichen hectare
-optimal fraction of females about 93%
-meat production mainly from calf slaughtering
-optimal recovery from overgrazed pastures is slow
-economic "shadow value" of males is higher than that of females
-Finnish legislation and government control practices are problematic
(E.g. the tragedy of the commons -nature of the problem not understood)
Steady state population structure and slaughtering
(b)
(a)
140
Number of males 1000 ha-1
Number of females 1000 ha-1
140
120
100
80
60
40
20
0
120
100
80
60
40
20
0
0
2
4
6
8
10
0
Female age class
Survivors
Slaughtered
1
2
3
4
Male age class
Survivors
Slaughtered
Figure 4a,b. Optimal steady state age and sex structure and slaughtering (zero interest rate)
69% (93%) of female (male) calves slaughtered
adult females slaughtered at the age of 9.5yrs
adult males at the age of 5.5yrs
5
Example 2: Economics of uneven-aged forestry
Present forest management practice is close to a plantation forestry model:
land preparation, planting of seedlings =>waiting, thinning=>waiting, thinning=>clearcut=>
land preparation, planting of seedlings =>···
An alternative is to harvest trees from largest size classes* every 20 years without clearcuts and
rely on continuous natural regeneration
=>uneven-aged forestry that became legal in Finland in 2014
Economic approach is to take ecological model for the growth of uneven-aged forests, integrate
that with economic objectives and solve optimal forest harvesting
Basic result: If the aim is to maximize timber production, apply even-aged forestry
If the aim is to maximize economic surplus, uneven-aged forestry is a
fully competitive alternative e.g. for Norway spruce
*and inferior quality trees
Optimal steady state stand structures:
Scots pine
Norway spruce
Number of trees ha-1
Number of trees ha-1
H100=15
H100=20
H100=24
100
100
100
80
80
80
60
60
60
40
40
40
20
20
20
0
250
0
1 2 3 4 5 6 7
250
H100=27
250
1 2 3 4 5 6 7
200
200
150
150
150
150
100
100
100
100
50
50
50
50
0
0
0
Birch
Number of trees ha-1
0.9 1.9m3
664 1514€
1.6 6.2m3
1166 4836€
2 3.1m3
1222 1926€
250
200
Size class
Revenues per
15 yrs
0
1 2 3 4 5 6 7
200
1 2 3 4 5 6 7
Annual yield:
350
300
250
200
150
100
50
0
0
1 2 3 4 5 6 7
1 2 3 4 5 6 7
350
300
250
200
150
100
50
0
1 2 3 4 5 6 7
Size class, cm
Natural mortality
1 2 3 4 5 6 7
350
300
250
200
150
100
50
0
1 2 3 4 5 6 7
Size class, cm
Harvests
1 2 3 4 5 6 7
Size class, cm
Trees after harvests
Figure 8: Optimal steady-state structures when net present value of forestry income is maximized
using a 3% interest rate for Scots pine, Norway spruce, and birch with a 15-year harvesting interval.
Size classes begin from a diameter of 7.5 cm and increase in 5 cm intervals.
Source: Rämö and Tahvonen 2014
Problems in interdisciplinarity 1: Economics & production ecology in forest sciences
Why ecologists may include social science aspects in their studies?
Purely instrumental motives vs. non-instrumental motives
How ecologists can include social dimensions in their studies?
1 Work closely with stakeholders and end-users
2 Extend ecological concepts to cover social dimensions
3 Work closely with social scientists
Forest scientists have traditionally applied 1 & 2
The outcome:
1 Many features in forest sciences (and policy) represent strange economics
~fake interdisciplinarity
2 Forest sciences (and policy) have supported the MSY –idea
-forest management becomes an objective "ecological-technical fact"
- this happens(?) to favor the strongest interest group (industry) and the forestry
profession itself =>moral hazard problem
3 Many interesting questions are difficult to study due to the narrow orientation of the
production ecology research in forestry
4 Some production ecologists find it inconvenient that economists use their models in
interdisciplinary context and then argue against their MSY -type of results
Problems in interdisciplinarity 2: The case of Begon et al. (1986, 1990, 1996, 2006, 737 pages)
Perhaps the leading ecology textbook in the globe
Contains a section on "Harvest management"
The authors first introduce MSY, its popularity and
some biological overexploitation risks
The authors then admit that social and economic
aspects cannot be neglected in this context
After MSY Begon et al introduce the well known fishery economic model by Gordon (1954)
but refer to two ecologists
Comment: the main economic message of the model is neglected (the open access case)
and the "ecologically favourable" result remains unclear
Next they introduce discounting and explain that if the discount rate is 10% p.a.
"90 fish now are as valuable as 100 fish in one year's time"
Comment: 90 fish 1 0.1
99 fish not 100 fish
They continue: commonly used discount rate is 10%, although after inflation it should be only 2-5%
and explain that economists´ justification for this is to incorporate "risk" i.e. for economists
"a bird in the hand is worth two in the bush"
Comments:
- risk does not, as a general rule, work similarly as increased discount rate
- the overall explanation of risk in fishery economic models by the above phrase
"a bird..." does not make sense
Next Begon et al . write that economic reasoning more or less neglects the facts that fish in the water
can grow and reproduce. Thus economics =>wrong investment decisions
Comment:
the growth of fish and population reproduction is (of course) included in fishery economic models
(e.g. in the Gordon 1954 model)
Finally Begon et al. write that if the discount rate is high compared to population productivity,
it makes economic sense to "liquidate" the whole biological population
Begon et al. conclusion:
- this is ecologically "disdainful way of treating the hungry mouths of the future"
- "new economics" must be forged that takes into account jobs lost, that alternative sources of
food must be found and that there are values assigned not only to things that can be bought
and sold
Comments:
- the "stock liquidation" was discovered by a mathematician/economist/biologist C. Clark (1973, Science)
- it was presented as a descriptive idea and Clark concludes his paper:
"In view of the likelihood of private firms adopting high rates of discount, the
conservation of renewable resources would appear to require continual public
surveillance and control of the physical yield and the condition of the stocks."
Message: privatization of biological or renewable resources may not save them from extinction
This must be contrasted with biologist G. Hardin (1968) who suggested privatization as one
solution for the "tragedy of the commons"
Please, do not kill the messenger!
- as a normative idea "stock liquidation" makes economic sense only if the given
population does not have any other values besides raw material (note: even harmful
invasive species exist)
- as such the stock liquidation idea does not necessarily represent shortsightedness
Is this section in Begon et al. harmless?
- not an exception; it crystallizes a quite common view* ( Hiedanpää 2012, Jennings et al. 2001)
- students may become quite suspicious =>better to keep "distance" with economics and
concepts like "profits" and "discounting“, and use ecological concepts instead
- Stevens et al. (2007): the process to bring different disciplines together is still slow; one reason
is the basic lack of "trust"
=> around the globe the section may have significant influence on students’ "basic lack of trust"
and willingness to collaborate with economists
*" Economists are not able to see far, a serious problem in environmental protection "
J. Hiedanpää, Economics.In Interdisciplinary environmental research (in Finnish), Lummaa et al. (Eds.), Gaudeamus, 2012.
Comment: when economists study natural resources they apply infinitly ( ) long time horizon.
Conclusions
Problem 1:
In economics, values are based on preferences of well informed humans and this typically
leads to trade-offs and substitutability although the approach allows something to have an
infinite value and no substitution possibilities
The resource and environmental economics paradigm:
Maximize an objective function subject to ecological and other physical constraints
given the objective function is based on the preferences of well informed humans
Ecologists sometimes take different ethical approach and argue that human preferences do not
give a reasonable basis on how resources should be utilized
Is this difference one explanation behind the "basic lack of trust"?
Please recall the Natural Fallacy
Problem 2: How scientists in different disciplines motivate their students (and themselves)?
Business as usual strategy (in economics, ecology, physics, ...):
1. Make students (and yourself) believe that the discipline they (and you) have chosen
is absolutely superior compared to neighboring disciplines
2. Apply straw man arguments to eliminate neighboring sciences (cf. Begon et al.)
Alternative strategy: Yet to be discovered – suggestions?
To some extent this is "The tragedy of the commons" or prisoner's dilemma problem
The scientists in ecology and economics should know well how to proceed in
solving such problems
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Clark C. The Economics of Overexploitation. Science 181: 630-634, 1973.
Gollier, C. Ecological discounting. Journal of Economic Theory 145: 812-829.
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