Many scientists have long complained that standard economics fails to account for the biological and physical systems that form the basis of the economy. In short, the economy is a subset of the environment and governed by the same biological and physical laws as every other system on the planet.
In 1850 when the total world population was 1.26 billion, the idea that resources critical to industrial society would decline or even run out seemed far-fetched. Fast forward to today where threats of fossil fuel depletion, mineral depletion, groundwater depletion, fisheries destruction, soil erosion and decline in soil fertility are being seriously discussed in scientific, policy and journalistic circles. The population has reached almost 6.8 billion, and there are questions about whether current rates of consumption can continue without threatening the resource base vital to modern society as well as the stability of the climate and critical ecosystems.
The human footprint on the planet has increased enormously, not merely by the factor of about 5.3 times suggested by population growth, but more like the 45 times suggested by the rise in total consumption of energy. (See slide number 13 in David Hughes' excellent presentation before the Association for the Study of Peak Oil & Gas - USA 2008 conference.)
Neoclassical economists have long held that industrial societies will not run out of needed resources for two reasons: 1) Rising prices for scarce resources will lead to more efficient use of them, and 2) those same rising prices will spur innovation that will end the need for the scarce resource or find a more abundant substitute. Many of the same economists have also embraced the idea that exponential growth of the world economy can go on indefinitely, in part because of the effect of prices on efficient use of resources and substitution for them.
These claims are not easily dismissed for historical reasons. History has recorded case after case of more abundant resources being substituted for increasingly scarce ones. And, human civilization has experienced almost continuous economic growth since the dawn of the industrial age.
Still, some scientists and even a few economists are concerned enough to propose an entirely different basis for economics. First, they point to the impossibility of perpetual economic growth. Since the economy is a subset of the environment, it cannot grow larger than that environment. Yes, we may learn to do things more efficiently and more intelligently over time. But at some point the physical throughput of the economy will cease to grow. We simply cannot process more material than is contained in the entire biosphere. And, the limit of what we can process is undoubtedly only a fraction of the total biosphere since human life depends on the proper functioning of many other ecosystems which must have access to resources from the biosphere as well.
Second, efficiency in resource use has only led to greater consumption, a counterintuitive outcome known as the Jevons Paradox. The world has seen again and again that as efficiency in resource use increases, prices drop and more and more people are able to afford and therefore demand those resources to enhance the quality of their lives. Efficiency also tends to promote overall economic growth. The end result is faster depletion of finite resources and overuse of renewable ones such as fisheries.
Third, substitution requires time. Because industrial society is entirely dependent on the continuous functioning of its machine infrastructure, disruption resulting from the failure to find a substitute for a critical input such as, say, fossil fuels, in a timely fashion risks the collapse of that system.
These and other concerns have led to a widening literature on what is now referred to as biophysical economics. Biophysical economics is often used interchangeably with ecological economics. While biophysical economics borrows much of its analysis from ecological economics, biophysical economics focuses on the central role of energy flows through the economic system and therefore the role that entropy and depletion play in its functioning and prospects.
The main insight in biophysical economics is that the use of finite fossil fuel resources is a linear system, a one-way street if you will, when it comes to entropy. All of human civilization now depends on the exponentially increasing use of fossil fuels. In energetic terms we are taking low entropy matter and converting it to high entropy matter using some of the energy liberated by the conversion to perform work in society. This is just a fancy way of describing the combustion of fossil fuels which provide 86 percent of the energy for the global economy. But it points up a very important principle embodied in the Second Law of Thermodynamics. The universe is moving inexorable toward a state of higher entropy. Once fossil fuels are transformed from low entropy states (coal, oil, natural gas) to a high entropy state (carbon dioxide and heat), they cannot be reused.
Since fossil fuels are finite and substitution requires time, it is critical that the move from fossil fuels to some other energy source for the economy begin long before exhaustion so current sources of energy can be used to build the next energy economy. This is what is often referred to as the rate-of-conversion problem.
Neoclassical economics posits that marketplace dynamics will determine the energy transition from fossil fuels to something else through the price mechanism coupled with innovation. Some have therefore referred to neoclassical economics as "faith-based" since it assumes that energy prices will behave in ways that encourage a smooth transition. It also assumes that innovation will appear as needed and more importantly, in time to be deployed widely enough so as to avoid a prolonged gap in the operation of the modern machine infrastructure, a gap that could ultimately lead to a collapse of the system.
Biophysical economics then is 1) a critique of the weaknesses of the current prevailing neoclassical economic thinking which is pervasive in government and industry planning circles and 2) an attempt to map out a new set of principles that are biophysically based. Biophysical economics seeks neither to throw out all that neoclassical economics can tell us about markets and incentives, nor does it propose to provide an energy theory of value. Rather, it is attempting to provide a more comprehensive view of the interactions of the economy and the natural world so as to make policy decisions better informed.
Many will say that neoclassical economics has served us well in describing people and markets and has helped to provide a framework for unprecedented material prosperity for humans throughout the world. But a growing chorus of critics finds neoclassical economic ideas wanting when it comes to describing people's actual economic behavior; explaining and preventing breakdowns in market functions such as those that occurred in 2008; or preventing massive environmental damage including climate change, rapid declines in fisheries, soil erosion, toxic emissions, water depletion and myriad other problems. Neoclassical economists refer to the the last class of problems as externalities. But it is just such externalities that biophysical economics seeks to include within a new system of economic thinking.
Energy is not the only thing which provides value in an economic system. But it is the "master resource" without which nothing else gets done. Its use and misuse are the central plank of an ecologically minded biophysical economics. As the planet's leaders grapple with the myriad ecological and resource problems that threaten the very continuity of modern civilization, they should look to biophysical economics for a more comprehensive view of where the human economy fits into the broader environment.
Cleveland, Cutler (Lead Author) and Robert Costanza (Topic Editor). 2008. "Biophysical economics." In: Encyclopedia of Earth. Eds. Cutler J. Cleveland (Washington, D.C.: Environmental Information Coalition, National Council for Science and the Environment).
Hall, Charles A. S. and Kent A. Klitgaard. The Need for a New, Biophysical-Based Paradigm in Economics for the Second Half of the Age Of Oil. International Journal of Transdisciplinary Research. Vol. 1, No. 1, 2006: 4-22.