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Neo-Classical Economics and Ecological Economics Essay

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Updated: Sep 16th, 2021

Introduction

Different schools of thought supported and evolved multiple versions of economics. The neo-Classical Economics, proposed and strengthened by such classic thinkers and economists as Adam Smith and David Ricardo, included also the works of John Stuart Mill. The Utilitarianism proposed by John Stuart Mill forms one part of the basic assumptions that lead Neo-Classical Economics. While on the other side, ecological economics is more recent and brings into focus all the parameters that makeup economics. It looks at all factors that form a part of the society as a whole and that which decides on the overall development of the economics as well as the environment. Robert Costanza, Herman Daly and Nicholas Rogen brought Ecological Economics to the fore. In this paper, a brief look is taken at the differences and similarities between the two theories of economics.

Neo-Classical Economics

The basic assumptions behind neoclassical economics are the following (Christian Arnsperger et al, 2006):

  1. People have rational preferences and these can be allocated a value. Every one of the goods or services used by the people has a value or a value that can be worked out. Based on this it can be found that individuals tend to maximize the utilitarian value of the goods and services that they use.
  2. Whereas on the other hand, the firms driven by the shareholders tend to maximize their profitability. This can be reasoned out as the measure by the firms to ensure that they are in business and they serve the interest of the shareholder.
  3. All people before making their decisions do so with full knowledge of the product or service or decision. According to this theory, they will have all the relevant information on the decision that they are about to take.

The neo-Classical theory stresses the utility of the product or service and tries to ensure that this would not only increase the utility of the product to the individual but also increase the profitability of the firm. This theory is substantiated and was found to be valid in microeconomics. However, the number of factors that could affect the operation of the economics in a macroeconomic scenario is substantially high. Therefore, based on these assumptions, it was possible to explain many of the behaviours of the economic cycles (Roy Weintraub 2002). This could also produce a supply-demand curve and also explain the relationship between them. The theory also explained marginal productivity under conditions of recession and the income distribution across the society and multiple societies. It also could explain the reasons behind why such changes are happening. New concepts were extended in the form of steady-state theories modifying the neoclassical theory to suit the situation. However, all this could produce mathematical models that would identify the variations in production caused by supply-demand variations.

Ecological Economics

Ecological Economics, on the other hand, looks at the entire environment as a whole. This results in looking at not only the economic growth of the people but the development of the entire biosphere as a whole. It should result in a better living style for the entire community, not just the GDP growth (Michael Common Sep 2005). The differentiation happens even in the word that is employed. While the neo-classical theory looks ‘growth’ of economics, this theory looks at it as ‘development’. Development takes every aspect of the system with itself while growth is more individualistic.

This economic theory looks at sustainable development in all spheres of work that is done. This should look at a stable work environment resulting in a prolonged and sustained growth and development of the people and the ecology they live in. Ecological economics looks at the natural capital also as an asset. This asset would include such things as naturally available water, human capital, natural resources and others. The economics should also add as a capital asset these resources since they also form a part of the economic development (Robert Costanza, et al 1997). This theory rests on the fact that bio-diversity stability and growth in bio-diversity and in the creativity of the people lies the development of the environment and the society at large. In other cases, the growth is connected only to the economic well being of the individuals. According to this theory, the economic per capita consumption does not look at the well being of the environment as a whole. As a matter of fact, in a number of cases where there is a high economic per capita consumption, there is a possibility that the environment is swiftly affected and could have a long term implication on the well being of the society. This, the ecological economy says, could affect the way the environment sustains itself. Human consumption could lead to instability in the environment.

Conclusion

While neoclassical economics focuses on the valuation of the utility and the supply-demand market scenarios, ecological economics identifies itself with the environment and tries to identify the growth of the person with the overall sustainable development of the society. With closer and well-meaning thought over both the system of economics, it is seen that the rationality is clearer with ecological economics. It is hard to have a short term objective. A long term vision on the economic and social well being of human beings would reflect that ecological economics is the way the health of a nation or a society should be evaluated. This is possibly the reason why the valuation calculations for ecological economics have been done and more research is being done on the specified topic.

References

  1. Christian Arnsperger & Yanis Varoufakis (2006) What is Neo Classical Economics? Post-autistic Economic Review. Issue 38, Article 1.
  2. Michael Common & Sigrid Stagl (2005) Ecological Economics: An Introduction. Cambridge University Press.
  3. Robert Costanza, et al (1997) An Introduction to Ecological Economics. ISEE, CRC press – St Lucie Press.
  4. Roy Weintraub (2002) . The concise Encyclopedia of Economics. Liberty Fund Inc. Web.
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