Ecological Economics 2☆
Robert Costanza, Australian National University, Canberra, ACT, Australia
r 2019 Elsevier Inc. All rights reserved.
Introduction
Stories about the economy typically focus on gross domestic product (GDP), jobs, stock prices, interest rates, retail sales, consumer
confidence, housing starts, taxes, and assorted other indicators. We hear things like “GDP grew at a 3% rate in the fourth quarter,
indicating a recovering, healthy economy, but with room for further improvement.” Or, “The Fed raised short-term interest rates
again to head off inflation.”
But do these reports, and the indicators they cite, really tell us how the economy is doing? What is the economy anyway? And
what is this economy for?
Conventional reports on these questions are rather narrow. The “economy” we usually hear about refers only to the market
economy—the value of those goods and services that are exchanged for money. Its purpose is usually taken to be to maximize the
value of these goods and services—with the assumption that the more the activity, the better off we are. Thus, the more the GDP
(which measures aggregate activity in the market economy), the better. Likewise the more contributors to GDP (such as retail sales
and salaries paid to employees), the better. Predictors of more GDP in the future (such as housing starts and consumer confidence)
are also important pieces of information from this perspective. Declining or even stable GDP is seen as a disaster. Growth in GDP
is assumed to be a government's primary policy goal and also something that is sustainable indefinitely.
But is this what the economy is all about? Or more accurately, is this “all” that the economy is about? Or, is this what the
economy “should be” about? The answer to all of these is an emphatic “no.” Here's why.
Let's start with purpose. The purpose of the economy “should be” to provide for the sustainable well-being of people. That goal
encompasses material well-being certainly—but also anything else that affects well-being and its sustainability. This seems obvious
and noncontroversial. The problem comes in determining what things actually affect well-being and in what ways.
There is substantial new research on this “science of happiness” that shows the limits of conventional economic income and
consumption in contributing to well-being. Psychologist Tim Kasser in his 2003 book The High Price of Materialism points out, for
instance, that people who focus on material consumption as a path to happiness are actually less happy and even suffer higher
rates of both physical and mental illnesses than those who do not. Material consumption beyond real need is a form of
psychological “junk food” that only satisfies for the moment and ultimately leads to depression, Kasser says.
Economist Richard Easterlin, a noted researcher on the determinants of happiness, has shown that well-being tends to correlate
well with health, level of education, and marital status, and with income only up to a fairly low threshold (Fig. 1). He concludes in
a recent paper in the Proceedings of the National Academy of Sciences that,
People make decisions assuming that more income, comfort, and positional goods will make them happier, failing to recognize that hedonic
adaptation and social comparison will come into play, raise their aspirations to about the same extent as their actual gains, and leave them feeling no
happier than before. As a result, most individuals spend a disproportionate amount of their lives working to make money, and sacrifice family life and
health, domains in which aspirations remain fairly constant as actual circumstances change, and where the attainment of one's goals has a more
lasting impact on happiness. Hence, a reallocation of time in favor of family life and health would, on average, increase individual happiness.
British economist Richard Layard's 2005 book Happiness: Lessons from a New Science echos many of these ideas and concludes
that current economic policies are not improving happiness and that “happiness should become the goal of policy, and the
progress of national happiness should be measured and analyzed as closely as the growth of GNP.” Several countries are now
interested in alternative measures of progress. For example, the country of Bhutan has recently announced that it will make “gross
national happiness” its explicit policy goal.
Economist Robert Frank, in his 2000 book Luxury Fever, also concludes that the nation would be better off—overall national
well-being would be higher, that is—if we actually consumed less and spent more time with family and friends, working for our
communities, maintaining our physical and mental health, and enjoying nature.
On this last point, there is substantial and growing evidence that natural systems contribute heavily to human well-being
(Fig. 2). In a paper published in 1997 in the journal Nature, the author with his co-workers estimated that the annual, nonmarket
value of the Earth's ecosystem services is $33 trillion globally, substantially larger than global GDP. The just released UN
Millennium Ecosystem Assessment is a global update and compendium of ecosystem services and their contributions to human
well-being.
So, if we want to assess the “real” economy—all the things which contribute to real, sustainable, human welfare and quality of
life—as opposed to only the “market” economy, we have to measure the nonmarketed contributions to human well-being from
☆
Change History: February 2018. R. Costanza made minor changes to the text, figures and references.
This is an update of R. Costanza, Ecological Economics 2, In Encyclopedia of Ecology, edited by Sven Erik Jørgensen and Brian D. Fath, Academic Press,
Oxford, 2008, pp. 1006–1011.
Encyclopedia of Ecology, 2nd edition, Volume 4 doi:10.1016/B978-0-12-409548-9.11126-1 265
nature, from family, friends, and other social relationships at many scales, and from health and education. One convenient way to
summarize these contributions is to group them into four basic types of capital that are necessary to support the real, humanwelfare-producing
economy: built capital, human capital, social capital, and natural capital (Fig. 3).
The market economy covers mainly built capital (factories, offices, and other built infrastructure and their products) and part of
human capital (spending on labor), with some limited spillover into the other two types. Human capital includes the health,
knowledge, and all the other attributes of individual humans that allow them to function in a complex society. Social capital
includes all the formal and informal networks among people: family, friends, and neighbors, as well as social institutions at all
Fig. 1 Relationship between GNP per capita and life satisfaction. Source: World Development Report.
Fig. 2 Consequences of ecosystem change for human well-being. Source: Millennium Ecosystem Assessment.
266 Human Ecology and Sustainability: Ecological Economics 2
levels, like churches, social clubs, local, state, and national governments, NGOs, international organizations, and the institutions
of the market itself. Natural capital includes the world's ecosystems and all the services they provide that support human wellbeing.
Ecosystem services occur at many scales, from climate regulation at the global scale, to flood protection, soil formation,
nutrient cycling, recreation, and esthetic services at the local and regional scales.
So, how have the world's real economies been doing recently, compared to their market economies? The short answer is, not so
good. How do we know? One way is through surveys of people's life satisfaction, which in the United States has been decreasing
slightly since about 1975. A second approach is an aggregate measure of the real economy that has been developed as an
alternative to GDP called the genuine progress indicator, or GPI.
Let's first take a quick look at the problems with GDP as a measure of true human well-being. GDP is not only limited—
measuring only marketed economic activity or gross income—it also counts all of this activity as positive. It does not separate
desirable, well-being-enhancing activity from undesirable well-being-reducing activity. For example, an oil spill increases GDP
because someone has to clean it up, but it obviously detracts from society's well-being. From the perspective of GDP, more crime,
more sickness, more war, more pollution, more fires, storms, and pestilence are all potentially good things, because they can
increase marketed activity in the economy.
GDP also leaves out many things that do enhance well-being but are outside the market. For example, the unpaid work of
parents caring for their own children at home does not show up, but if these same parents decide to work outside the home to pay
for child care, GDP suddenly increases. The nonmarketed work of natural capital in providing clean air and water, food, natural
resources, and other ecosystem services does not adequately show up in GDP, either, but if those services are damaged and we have
to pay to fix or replace them, then GDP suddenly increases. Finally, GDP takes no account of the distribution of income among
individuals. But it is well-known that an additional $1 worth of income produces more well-being if one is poor rather than rich. It
is also clear that a highly skewed income distribution has negative effects on a society's social capital.
The GPI addresses these problems by separating the positive from the negative components of marketed economic activity,
adding in estimates of the value of nonmarketed goods and services provided by natural, human, and social capital, and adjusting
for income-distribution effects (Fig. 4 lists the components of the GPI). While it is by no means a perfect representation of the real
well-being of a nation, GPI is a much better approximation than GDP. As Amartya Sen and others have noted, it is much better to
be approximately right in these measures than precisely wrong.
Comparing GDP and GPI for several countries shows that in many “developed” countries the benefits of growth in the market
economy are now being outweighed by the uncounted costs of that growth. For example, Fig. 5 shows that globally, while GDP
has steadily increased since 1950, with the occasional dip or recession, GPI peaked in about 1978 and has been gradually
decreasing ever since. From the perspective of the real economy, as opposed to just the market economy, the world has been in
recession since 1978. As already mentioned, this picture is also consistent with survey-based research on people's stated lifesatisfaction.
We are now in a period of what Herman Daly has called “un-economic growth,” where further growth in marketed
economic activity (GDP) is actually reducing well-being on balance rather than enhancing it. In terms of the four capitals, while
built capital has grown, human, social, and natural capital have declined or remained constant and more than canceled out the
gains in built capital.
Fig. 3 Quality of life as the interaction of human needs and the subjective perception of their fulfillment, as mediated by the opportunities
available to meet the needs. From Costanza, R. J., Fisher, S., Ali, C. et al. (2006) Quality of life: An approach integrating opportunities, human
needs, and subjective well-being. Ecological Economics 61, 267–276.
Human Ecology and Sustainability: Ecological Economics 2 267
From the perspective of the real economy, things are not improving.
Is the news all bad? No. We estimated the GPI of the State of Vermont and of Burlington, the state's largest city, and found that
Vermont's and Burlington's GPI per capita had increased over the entire 1950–2000 period and is now more than double the
national average. This was due to Vermont's attention to protecting and enhancing natural, human, and social capital in balance
with gains in built capital—accomplished through the application of strong, local democratic principles, and processes still
actively at work in Vermont. Recent GPI studies of all US states by M-V Fox and J. Erickson show that the range of variation is
quite large.
The lesson is that there is significant variation within and across states and countries in trends in well-being and quality of life,
and plenty of good examples we can learn from to improve overall well-being at multiple scales.
How can we apply these lessons to get out of the real recession in human well-being at the national scale that many countries
are now in? Several policies have been suggested that would help to turn things around:
Fig. 4 The genuine progress indicator (GPI) by column.
Fig. 5 Global GDP/capita vs. GPI/capita, 1950–2014. Source: Kubiszewski, I., Costanza, R., Franco, C., Lawn, P., Talberth, J., Jackson, T. and
Aylmer, C. (2013). Beyond GDP: Measuring and achieving global genuine progress. Ecological Economics. 93, 57–68.
268 Human Ecology and Sustainability: Ecological Economics 2
• Shifting our primary national policy goal from increasing marketed economic activity (GDP) to maximizing national wellbeing
(GPI or something similar). This would allow us to see the interconnections between built, human, social, and natural
capital and build well-being in a balanced and sustainable way.
• Reforming tax systems to send the right incentives by taxing negatives (pollution, depletion of natural capital, overconsumption)
rather than positives (labor, savings, investment).
• Reforming international trade to promote well-being over mere GDP growth. This implies protecting natural capital, labor
rights, and democratic self-determination first and then allowing trade, rather than promoting the current trade rules that
ignore all nonmarket contributions to well-being.
• Implementing strong democracy, as Tom Prugh, Robert Costanza, and Herman Daly have argued in the book The Local Politics
of Global Sustainability. Strong democracy implies true participation of all in governance and is an essential prerequisite to
building a sustainable and desirable future.
• Increasing the size of the “common sector” of the economy (as opposed to the private and public sectors) but creating common
property asset trusts to “propertize” natural and social capital assets, as described in Peter Barnes’ book Capitalism 3.0.
Ultimately, getting out of the recession in well-being we are currently in will require us to look beyond the limited definition of
the “economy” we read about in the newspapers, and recognize what the real economy is and what it is for. We must not allow
deceptive accounting practices to paint an inaccurate and ultimately destructive picture of how “well” we are doing. Alternatives
are available, but they need significant further discussion and research.
With nothing less than our current and future well-being at stake, we can certainly afford to devote greater effort to learning
how to adequately understand and measure it. If we want things that really matter to our well-being to count, we must learn how
to recognize and count them, use that information to inform policy in a real democracy, and create adaptive institutions that can
effectively implement the policy.
See also: Human Ecology and Sustainability: Resilience; Ecosystem Services Evaluation; Ecological Systems Thinking
Further Reading
Barnes, P., 2006. Capitalism 3.0: A Guide to Reclaiming the Commons. San Francisco, CA: Berrett-Koehler.
Costanza, R., d'Arge, R., de Groot, R., et al., 1997. The value of the world's ecosystem services and natural capital. Nature 387, 253–260.
Costanza, R.J., Erickson, K., Fligger, A., et al., 2004. Estimates of the genuine progress Indicator (GPI) for Vermont, Chittenden County, an Burlington, from 1950 to 2000.
Ecological Economics 51, 139–155.
Costanza, R.J., Fisher, S., Ali, C., et al., 2006. Quality of life: An approach integrating opportunities, human needs, and subjective well-being. Ecological Economics 61,
267–276.
Daly, H.E., Farley, J., 2003. Ecological economics: Principles and applications. Washington, DC: Island Press.
Easterlin, R.A., 2003. Explaining happiness. Proceedings of the National Academy of Sciences 100 (19), 11176–11183.
Fox, M.-J.V., Erickson, J.D., 2018. Genuine economic progress in the United States: A fifty state study and comparative assessment. Ecological Economics 147 (2018), 29–35.
Frank, R., 1999. Luxury fever: Why money fails to satisfy in an era of excess. Mankato, MN: The Free Press.
Kahneman, D., Diener, E., Schwarz, N., 1999. Well-Being: The Foundations of Hedonic Psychology. New York: Russell Sage Foundation.
Kasser, T., 2003. The high price of materalism. Cambridge, MA: MIT Press.
Kubiszewski, I., Costanza, R., Franco, C., Lawn, P., Talberth, J., Jackson, T., Aylmer, C., 2013. Beyond GDP: Measuring and achieving global genuine progress. Ecological
Economics 93, 57–68.
Layard, R., 2005. Happiness: Lessons from a new science. New York: Penguin.
Prugh, T., Costanza, R., Daly, H., 2000. The local politics of global sustainability. Washington, DC: Island Press, 173 pp.
World Health Organisation, 2006. Millennium ecosystem assessment: Synthesis. Washington, DC: Island Press.
Human Ecology and Sustainability: Ecological Economics 2 269