The Centre for the Management of Environmental Resources

Working Papers

R & D CMER

ON THE LIFE CYCLE METAPHOR: WHERE ECOLOGY AND ECONOMICS DIVERGE

R. AYRES*

2002/119/EPS/CMER

This working paper was published in the context of INSEAD’s Centre for the Management of Environmental Resources, an R&D partnership sponsored by Novartis, Shell, and Paul Dubrule.

* Emeritus Professor of Economics and Political Sciences, Centre for the Management of Environmental Resources (CMER) at INSEAD, Boulevard de Constance, 77305, Fontainebleau Cedex, France.

A working paper in the INSEAD Working Paper Series is intended as a means whereby a faculty researcher's thoughts and findings may be communicated to interested readers. The paper should be considered preliminary in nature and may require revision.

Printed at INSEAD, Fontainebleau, France. ON THE LIFE CYCLE METAPHOR: WHERE ECOLOGY AND ECONOMICS DIVERGE

Robert U. Ayres

Center for the Management of Environmental Resources INSEAD 77305 Fontainebleau Cedex France [email protected]

August 2002

Abstract

There is an attractive analogy between nature and industry, based on the similarity of natural functions and certain industrial activities. For instance, animals ingest (eat) and digest food. Finally, there are metabolic wastes. Firms are analogous to organisms in several respects, insofar as they consume material resources, process (digest) them, and produce outputs products and excrete wastes. Firms, like organisms, also compete with each other for resources. However there are at least four important differences between the biosphere and the techno-sphere. First, there is no primary producer in the techno-sphere, playing the same role as photo-synthesizers play in the biosphere. Second, in the biosphere there are no products except biomass (fruit, nuts, seeds or eggs). It produces only wastes and more of itself plus dead matter. Third, there is nothing like money and there is no labor. Indeed, there are no voluntary exchanges (i.e. no trade). Exchanges are involuntary (i.e. by predation, parasitism or theft.) Fourth, and contrary to what many laymen believe, the natural system does NOT recycle everything. Far from it. Water, CO2, and oxygen are recycled via an external reservoir (the atmosphere). Nitrogen, phosphorus and potassium are partially recycled through dead biomass (humus and topsoil). Other elements such as sulfur, calcium and trace metals are not efficiently recycled, except via slow geological processes. Coal and petroleum are obvious examples of wastes (recycled but not biologically), and so are chalk, limestone, marble, iron ore and sedimentary phosphate rock, to name a few. In ecology, growth is tantamount to accumulation of embodied solar exergy in the form of cellulose, sugars, lipids and proteins. In economics, by contrast, the inputs are mostly natural resources, capital services and labor, whereas the output is a heterogeneous mix of manufactured products and services. Labor, in economics, is an input, but not an output. The economic system recycles much less than the ecological system but utilizes a far greater suite of elements. Finally, evolution in nature is driven by differentiation by random mutations of the genome and Darwinian selection based on reproductive success. In economics, differentiation is based on discovery, invention and innovation by economic agents and selection is based on competition at the individual or firm level.. Either way, the economic system is not closely analogous to an ecosystem. Attempts to use ecological concepts in an economic context are sometimes misleading and unjustified. R. U. Ayres On the life cycle metaphor: Where ecology and economics diverge October 31, 2002 Page 2

Background

Three decades ago, now, traditional resource economics and welfare economics spawned an environmental branch, with its own society combining environmental and resource economicsts, and created a journal: the Journal of Environmental Economics and Management (JEEM). In its early years the journal was dominated (and edited) by ex- resource economists from Resources for the Future Inc (RFF). and a few western US universities such as New Mexico and Wyoming, where both resource management and environmental management were locally important. (The first two editors were Allen Kneese and Ralph d’Arge,) The journal grew rapidly in the 1970s, and inspired a European counterpart (Environmental and Resource Economics) about ten years ago. The editors of JEEM kept it well within the established limits of economic analysis, i.e. focusing on regulatory issues, benefit cost analysis, willingness-to-pay, and similar topics. Possibly because of this conservative bias, a group of ecologists influenced by the work of Howard Odum together with a few heterodox economist sympathizers (notably Herman Daly and other admirers of the work of Nicolas Georgescu-Roegen) founded another new journal Ecological Economics. Contributions were accepted from both fields, as well as a third group of scientists interested in the role of thermodynamics as an integrating and driving factor in both ecological systems and economic systems. (I confess to being one of the latter group). The analogy between input-output flows in economics and in ecological systems was one of the first topics to be exploited in ecological economics [Hannon 1973a]. The primary focus of the journal in the past decade has been on sustainability. Unfortunately, despite the editor’s best efforts, this journal has never achieved high prestige in either of the parent disciplines that one might have hoped for. Nevertheless, this journal has published a number of useful papers, of which I will cite a few for purposes of illustration [Daly 1989; Kummel 1989; Martinez-Alier 1989; Cleveland 1991; Costanza 1991b; Costanza 1991c; Lozada 1991; Mayumi 1991; Common and Perrings 1992; Kaufmann 1992; Bianciardi et al 1993a; Binswanger 1993; Williamson 1993; Mansson 1994; Azar and Holmberg 1995; Kaufmann 1995; Azar et al 1996; Guts 1996; Clark 1997; Daly 1997a; Gowdy and O'Hara 1997; Opschoor 1997; Pearce 1997; Perrings 1997; Sollner 1997; Alexander et al 1998; Ayres 1998b; Ayres 1998e; Ayres 1999a; Guinee et al 1999; Herendeen 1999; Rees 1999; van den Bergh and Verbruggen 1999; Wackernagel 1999; Levine 2000] However, an International Society for Ecological Economics now exists, and there are indications that it will gradually create its own constituency. In recent years another new proto-discipline, Industrial Ecology, (sometimes called Industrial Metabolism,) has emerged. This new discipline has been built, to a large extent, on the basis of perceived analogies between economic and ecological systems. One perceived analogy is the `life cycle’. All higher organisms exhibit a life cycle, beginning with conception, birth, adolescence, maturity, senescence and finally death. Interestingly enough, similar cycles have been observed for products, firms and even industries.[Levitt 1965; Vernon 1966; Polli and Cook 1969; Wells 1972; Miller and Friesen 1984; de Bresson and Lampel 1985; Audretsch 1986b; Audretsch 1986a; Ayres 1988a; Labys and Waddell 1988; Ayres and Martinas 1992; Heijungs 1992; Field and Ehrenfeld 1994; Ayres 1995a; Udo de Haes 1996; Ayres 1997d; Guinee 2001; Frankl 2002; Udo de Haes 2002]. The analogy with economic systems seems to have been strengthened by another common element: both systems are characterized by recognizably similar `metabolic’ functions. These include ingestion, digestion, excretion, reproduction and growth. Ingestion corresponds to the intake of raw materials; digestion corresponds to primary processing and separation of valuable fractions from wastes; excretion corresponds to waste disposal; R. U. Ayres On the life cycle metaphor: Where ecology and economics diverge October 31, 2002 Page 3

reproduction can be interpreted in several ways, the most obvious being mass production of an artifact from blueprints, while growth obviously applies to firms and economies as well as organisms or populations. The analogy between blueprints and genes has been widely exploited in several contexts, including the fascinating question of self-reproducing machines or factories [e.g. (von Neumann ??; [Criswell 1991]. These metabolic correspondences have prompted a number of explorations on the industrial side, especially focused on mass and energy (exergy) flows in the economy e.g.[Ayres 1989d; Ayres 1989i; Baccini and Brunner 1991; Ayres 1993b; Stigliani et al 1993; Ayres and Simonis 1994a; Fischer-Kowalski 1994; Lohm et al 1994]. There is another point of apparent similarity between ecological and economic systems that has attracted special attention in recent years, namely `recycling’. The recycling of elements in the biosphere is a fairly old topic. The flows of matter and energy between species in an ecosystem in equilibrium were discussed long ago; a useful summary can be found in Alfred Lotka’s seminal work on mathematical biology [Lotka 1950]. Flows of matter and energy between species have been stressed by Odum and others [Odum 1973; Patten and Finn 1979; Brooks and Wiley 1986];[Ulanowicz 1986]. The nutrient recycling feature of ecosystems has attracted the attention of industrial ecologists, especially since the publication of a well-known article entitled “Strategies for Manufacturing” in Scientific American [Frosch and Gallopoulos 1989]; see also [Duchin 1990; Allen and Behmanesh 1994; Allen 2002]The notion that nature is a model that industrial systems should consciously seek to imitate has taken hold [Benyus 1997]. In a broader context the similarity between ecosystems and industrial systems has proved appealing and intellectually productive. Indeed, a new Journal of Industrial Ecology was created about 5 years ago (MIT Press) and there is now an International Society for Industrial Ecology that meets regularly. The literature has grown rapidly since 1994, viz. [Allenby 1992b; Frosch 1994; Socolow et al 1994; Graedel and Allenby 1995; Ayres and Ayres 1996; Ehrenfeld and Gertler 1997; Allenby 1999; Ayres 2000d; Levine 2000; Ayres and Ayres 2002; Ehrenfeld and Chertow 2002; Jackson 2002; Watanabe 2002]. A final perceived analogy between biology and economics concerns evolutionary development. Evolution has been a core concept in biology since Darwin, and the literature is far too voluminous to summarize. (See, however [Maynard-Smith 1982b]). Evolutionary ideas in economics probably equally old, and the first formalization of innovation as a driver of growth goes back to the early years of the 20th century [Schumpeter 1912; Schumpeter 1961]. Quantitative theories have only got past the qualitative stage in recent years[Nelson and Winter 1974; Boulding 1981; Nelson and Winter 1982a; Axelrod 1984; Holland 1986c; Axelrod and Dion 1988; Hanusch 1988; Faber and Proops 1989; Foster 1989; Ayres and Martinas 1993; Hodgson 1993; Ayres 1994a; Andersen 1996; Ayres and Martinas 1996]. However, it must be said that the evolutionary process in biology bears little resemblance to the evolutionary process in economics, and I will not discuss it at length. In the remainder of this paper I focus mainly on areas where the analogy between economics and ecology is weak or misleading.

The recycling debate and `zero emissions’

An erroneous notion that the biosphere is a perfect recycler has prompted some misguided attempts to achieve `zero emissions’ in the industrial landscape by recycling all wastes. In this context, I cannot help mentioning the so-called zero emissions research initiative (ZERI) at the UNUniversity, Tokyo [Pauli 1994a] and a series of follow-up international conferences R. U. Ayres On the life cycle metaphor: Where ecology and economics diverge October 31, 2002 Page 4

[e.g. UNU, Tokyo, Nov. 8-9 1998]. The idea of zero emissions is actually based on a misunderstanding of ecology: namely the (false) idea that every biological waste is `food’ for some other organism. The obvious example is the carbon cycle. Plants consume carbon dioxide and produce oxygen as a waste. Animals consume oxygen and produce carbon dioxide as a waste. It is also true that complex ecosystems include parasites and decay organisms, which recycle some other nutrients (notably nitrogen and phosphorus), albeit imperfectly. But it is not true that there are no wastes in nature. Far from it: coal and petroleum, elemental sulfur, chalk, limestone, iron ore, and phosphate rock, are all examples of (geochemically transformed) biological wastes. The idea that some industry can always be found (or created) to consume another industry’s wastes, or even just its solid wastes, is a naive dream. The reason, very briefly, is that wastes are the most degraded forms of matter. There are occasional examples of industrial wastes that can be used and therefore appear to contradict this rule, but they are rare for one of two reasons: either they have been overlooked or they are too far away from the potential user to be worth transporting. Most industrial wastes are mixtures of materials that would still be useless as a raw material input even if they were separated into pure components. The most obvious example is mine waste which, after the valuable minerals are removed, is indistinguishable from ordinary rock or subsoil. It can be used for fill, but that is all. Carbon dioxide in combustion wastes has only one large-scale potential use, namely as an input to photosynthesis – which occurs largely outside the industrial system. But natural vegetation has all the carbon dioxide it needs or can use. In fact, `zero emissions’ from industry is only feasible in a few narrow and highly specialized contexts, primarily in the realm of food processing [Enzell et al 1995]. Recycling is another matter entirely, and many industrial wastes can be recycled, albeit not perfectly, and only by the application of significant amounts of energy (exergy) from somewhere outsifde the system. Nature recycles carbon and oxygen, by means of carbon cycle, which is driven by photosynthesis, i.e. by solar energy. However there is no analogy to the carbon cycle in the industrial world. In fact, there is no analog of photosynthesis in the industrial world. This essential difference alone invalidates the analogy between ecology and economics.

The accounting debate

It may be useful to focus briefly here on the Energy Quality Accounting Scheme (EQAS hereafter) proposed by H. T. Odum [Odum 1971; Odum 1973; Odum 1977b; Odum 1996]. The avowed purpose of EQAS is to facilitate meaningful comparisons between and among different energy-conversion systems or land-use changes in a human societal context and as a tool for making policy choices. To do so it attempts to reduce all kinds of material and energy flows to one single numeraire — solar eMergy1 — for purposes of calculating various derived quantities (such as "eMpower", "eMdollars", etc.) for evaluating energy quality. It is important to note that eMergy differs in several ways from standard energy measures used to describe current patterns of activity, as an Input-Output economist might calculate them [Herendeen 1974; Herendeen and Bullard 1974]. EMergy is defined as "work previously done to make a product or service" [Odum 1986; Odum 1996] or "energy memory" [Scienceman 1987]. The precursor work included in eMergy is historical. Indeed, the time scale is geological. It attempts to account for energy inputs as far back as the primitive earth. At first sight, this would seem to be analogous to the `rucksack’ of indirect or hidden’ R. U. Ayres On the life cycle metaphor: Where ecology and economics diverge October 31, 2002 Page 5

material flows associated with economic activity, given prominence by Schmidt-Bleek and other at the Wuppertal Institute [Schmidt-Bleek 1994; Adriaanse et al 1997]. However the indirect material flows in materials flow analysis (MFA) are concurrent, not historical. A crucial underlying assumption of EQAS is that biological evolution (phylogeny) and natural ecosystems structure are both consequences of a maximization principle. In particular, Odum adopts Ludwig Boltzmann's idea that living organisms compete for energy, restated as Alfred Lotka's `maximum power' principle [Lotka 1922 , p. 179]. More precisely, the principle states that "natural selection tends to increase the biomass and embodied free energy in the biosphere. It also tends to increase the rate of circulation of both matter and [free] energy flux through the system", or as Bertrand Russell's idea that every living thing is "a sort of imperialist, seeking to transform as much of its environment as possible into itself and its seed"[Russell 1927 , p. 174]. In other words, EQAS assumes is that there is a well- defined deterministic process in the natural world that converts solar energy into other forms of energy and other products, and that this process is optimal. It would follow that the evolutionary system can be characterized by unique transformation ratios. Odum has provided a term for these ratios of inputs to outputs, namely transformities. An example might be the conversion of buried biomass to coal by heat, pressure and time. Needless to say, transformity is always bigger than unity because inputs are always and necessarily greater than outputs. The inverse of a transformity is a (sort of) energy conversion efficiency. There are major difficulties in practice, of course, arising from joint inputs and joint outputs, not to mention scientific uncertainties. Apart from computational difficulties, there is another problem. It is worth noting that Lotka's law and its variants can be, and has been, interpreted as a tendency on the part of the biosphere to retard the universal increase in entropy. But recently the idea of living organisms as `dissipative systems' far from thermodynamic equilibrium has been elaborated as the principle of `maximum entropy production' [Prigogine and Stengers 1984; Brooks and Wiley 1988]. Obviously there is a conflict between these two theories, at least on the surface. If any maximum principle holds true, not only for biological processes but also for geophysical and geochemical processes, then it does follow — as Odum and his colleagues apparently assume — that the process that converted dead biomass (from the carboniferous era) into coal that can be mined today was optimal, in the sense that the process could not have been accomplished faster or with less solar input.2 However, the validity of either Lotka's Law or Prigogine's Principle (which seems to contradict it) are both unconfirmed hypotheses. They are not established facts as regards self-organization and biological evolution. There is much that these `laws' explain, but also much that they do not (yet) explain. Meanwhile, modern evolutionary theorists are skeptical that geochemical or geophysical evolution are `optimal' in the sense of being driven by such a law. On the contrary, in genetics there is a major role for `selective neutrality', namely, accidental mutations that offer no advantage [Kimura 1979]. On the larger planetary stage, the role of accidents is clearly very important and possibly dominant. This quasi-accidental picture of the evolutionary process is known as `punctuated equilibrium' [Gould 1979]. It is perhaps the only one that accommodates such events as the major extinctions, such as the event (probably an asteroid striking the earth about 65 million years ago) that wiped out the dinosaurs and opened the way for mammals. In short, there has been no independent verification of the calculations, the underlying theory is weak and there has been very little discussion of the underlying computational assumptions. The numbers are easily criticized. Skeptics can argue that the definition of transformity is not unique. (`Transformity’ is essentially the inverse of conversion R. U. Ayres On the life cycle metaphor: Where ecology and economics diverge October 31, 2002 Page 6

efficiency.) The difficulties are so great that the computational task would seem overwhelming to most people. Nevertheless, Odum's group has published many such ratios, which they regard as essentially `constants of nature' that can be used in EQAS for policy evaluation [e.g. Odum 1996]. To most physicists Odum’s effort to find a common numeraire seems misplaced because there is no clear and unambiguous causal relation between the solar energy impinging on the earth and the other primary sources of energy currently available on the earth, such as tides and deep heat (of radioactive origin), not to mention other mineral ores and fossil fuels. Even if the causal relationships were clearly defined – as for instance, photosynthesis producing biomass, accumulating in sediment and gradually being transformed (by pressure and heat) into coal or petroleum – there is no unambiguous way to calculate the thermodynamic efficiency of historical bio-geological processes. Hence there is no reliable way to calculate the quantity of solar energy needed in the distant past to produce a ton of coal or a barrel of oil. Proponents of EQAS might answer this criticism by arguing that simple physical definitions of energy quality in terms of heat or mechanical work do not reflect the value- added by land, biological systems, human labor and human technology. EQAS proponents describe eMergy as a measure of "quality", or of "value", almost interchangeably. The skeptic’s response is that, in this case, `quality’ is essentially a function of energy conversion efficiency, while `value-added’ is an economic concept that is inappropriate in this context.

Alternative approaches to computation of indirect flows

Luckily, there is an alternative and much simpler way of accomplishing the essential purpose of EQAS without the need to do an impossible calculation about poorly understood bio-geochemical processes in the distant past. In effect, the alternative approach is to calculate the amount of solar energy that will be needed in the near future to replace the energy (actually exergy) embodied in a ton of coal or a barrel of oil or a ton of copper ore that is used up in the present. The calculation involves two steps. The first is to calculate the amount of physical work that can be done by a ton of coal or a barrel of oil, using present day energy conversion technology. As it happens, electricity is essentially `pure’ work, because it can be re- converted to other forms of work with nearly zero loss [Ayres & Warr 2003]. Hence the first step in the calculation can be greatly simplified. It is to calculate the thermodynamic efficiency with which electricity can be generated from a ton of coal, etc. The answer is so well-known that it is almost trivial. The overall average efficiency of electric power generation in industrialized countries is about 33% allowing for transmission losses, while the most efficient power plants approach 50% conversion efficiency, disregarding transmission losses. By the middle of the next century the conversion efficiency of the system as a whole will probably increase to something like 50%, thanks to the widespread introduction of combined-cycle generating plants, together with reductions in distribution losses. The second step in the alternative approach is to define a technology for converting solar energy into electricity (i.e. work) and to estimate the future efficiency of such a technology. Practical means of doing this are already being developed rapidly [Ayres and Frankl 1998]. Combining the two steps will tell us how much solar energy is needed to replace that ton of coal or barrel of oil, in terms of a single common denominator, physical work, which can be equated to electric power. (A further refinement would be to calculate the amount of electric power needed to produce the material requirements of our civilization. To put it in simple R. U. Ayres On the life cycle metaphor: Where ecology and economics diverge October 31, 2002 Page 7

terms, there is no need to calculate how much solar energy delivered to the earth in the past was needed to create the artifacts and infrastructure of civilization. It suffices to be able to calculate how much solar energy will be needed in the future to sustain our industrial society. I have over-simplified to make an important point. Some refinements and caveats are needed. One of them is that electric power is not suitable (at present) for certain purposes, notably propelling self-propelled vehicles, especially aircraft. However, alcohol is a suitable fuel right now, and it can be produced from biomass (i.e. from photosynthesis.) In the longer run, hydrogen is suitable for all such propulsion purposes, and hydrogen can be produced from any hydrocarbon or – in the more distant future – from water by solar PV electrolysis. This is not a well developed technology, at present, but there is no reason in principle why it could not be highly developed and practical by the end of the new century. Ecologists will also point out that electricity is not a substitute for food or biomass. (Neither, for that matter is coal). It is clear that human society cannot hope to survive without the services of the biosphere (although the biosphere can exist without us). Therefore, in contrast to the current calculation of the human `footprint’ which assumes that land area is needed for recycling carbon dioxide from combustion [Wackernagel and Rees 1997], because, in the long run, solar energy can be converted to work by a photovoltaic (PV) cell without any combustion, at all, or by burning hydrogen as fuel. On the other hand, we will always depend upon bio-products and services from the natural environment – not only food – whence the long-term `footprint’ must still take into account the need for agricultural land, forests, and even wilderness areas to preserve bio-diversity. Unfortunately, nobody knows how to make such a calculation, at present. It would be an important objective for ecological research.

Resource accounting

The shape of a future resource accounting system is gradually emerging, in response (partly, at least) to new perspectives introduced by ecological economics and industrial ecology. The first wave, inspired by the `energy crisis’ of 1973-74 was a brief flurry of interest in `net energy’ accounting in the late 1970s and early 1980s [Herendeen and Bullard 1974; Slesser 1975; Herendeen et al 1979; Herendeen 1998]; [Slesser 1977]; [Bullard et al 1978]; [Spreng 1988]. While not directly applicable to resource accounting, net energy analysis stimulated interest in a unit that reflects the usefulness (or quality) of mass. Such a unit is exergy, which is a thermodynamic term that is relatively unfamiliar to most people. It is defined as the maximum work that can be done by a subsystem as it approaches thermodynamic equilibrium with its surroundings reversibly. There are several components of exergy, but the most important by far, and the only one that matters for resource accounting purposes, is chemical exergy. The chemical exergy of fossil fuels is essentially the same as the enthalpy (or heat content), and the exergy of electric power is identical to the amount of heat that can be produced by an electric resistance heater. Thus exergy is essentially what most people mean when they use the term energy. However, exergy is also a useful measure for other resources, including biomass and even mineral resources [Wall 1977; Wall 1986; Wall 1990; Wall et al 1994]. Moreover, exergy is also a potentially useful measure for the potential reactivity of material wastes and pollutants[Ayres et al 1998; Ayres and Ayres 1999a].

The value debate.

A number of non-economists have suggested that the economic value of a product or service R. U. Ayres On the life cycle metaphor: Where ecology and economics diverge October 31, 2002 Page 8

should be related to the energy (exergy) required to produce it. The first in modern times to suggest it was the British Nobel prize-winning chemist, Frederick Soddy on his book Cartesian Economics [Soddy 1922], followed by The Role of Money [Soddy 1935].3 Some ecologists, again led by Howard Odum, have tried to transfer the economic concept of value into an ecological context, using energy (actually exergy) and negative entropy as thermodynamic analogs of money and wealth [Odum 1971; Odum 1973; Odum 1977b]. Modern exponents of energy theories of value, in addition to Odum, include ecologist Robert Costanza [Costanza 1980; Costanza 1982] and others of the so-called biophysical school [Cleveland et al 1984; Hall et al 1986]. But the analogy between energy and money is strongly opposed by most economists [e.g. Huettner 1976]. Value in neo-classical economics is determined by individual preferences and choices. Sources of value in classical economics were assumed to be land (by the French physiocrats) or labor (John Locke, Adam Smith, Karl Marx). Today’s prevailing view goes back to John Suart Mill and utilitarianism. In the current paradigm, value is determined by an idealized competitive free market, which sets market value equal to market price, as determined by the equilibrium relationship between supply and demand. Buyers are individuals or firms for whom the internal value of a good or service is greater than the market price. Sellers are individuals or firms for whom the internal value is less than the price. Internal valuation by consumers is assumed to be based ultimately on comparative preferences for bundles of services [Debreu 1959]. Money, not energy, is the medium of exchange in economics, and it is fairly obvious that monetary value is not particularly correlated with energy (exergy) content, any more than it is correlated with weight. The monetary value per unit energy content of a Persian carpet or a diamond is extremely large compared to the monetary value per unit energy content of a lump of coal. However, the direct comparison of dollar value per unit of embodied exergy is not fair. In the case of the diamond, allowance should be made for the indirect exergy consumed in discovering, mining, sorting, and cutting, and perhaps also for the marketing and distribution. Similarly, in the case of the Persian carpet, allowance should be made for all the prior processes, ranging from sheep herding and shearing, to washing, carding, spinning, dyeing and so on. If all of these indirect energy (exergy) flows are taken into account, the discrepancy between diamonds and Persian carpets, on the one hand, and coal on the other hand, might not be so great. This is the position taken by Costanza and the so-called biophysical school. However, it is unlikely to be accepted by economists in the foreseeable future (if ever).

The role of labor and capital

The treatment of labor opens up another interdisciplinary chasm. Odum's approach, which seems reasonable at first sight, is to include the energy (exergy) consumed by workers as part of the exergy cost of production. But if the worker is really `human capital’ then the work done to develop those skills and create that capital need to be taken into account also. Odum therefore tries to include all preceding activities back to the nth generation, as a part of the calculation. Economists, by contrast, avoid infinite regression by a simple trick. They concede that prior activities contribute to physical capital and infrastructure, as well as knowledge and `human capital' (skills). But the economist argues that the food the weaver eats is consumption, and not the cost of production. Moreover, the weaver’s labor is valued by exchange markets in monetary terms, not energy terms. Finally, depreciation reduces the economic value of both physical capital and skills over time, which means that contributions R. U. Ayres On the life cycle metaphor: Where ecology and economics diverge October 31, 2002 Page 9

from earlier generations can be discounted.4 In effect, economic theory regards human labor as an independent input – not an intermediate input. Human labor, like capital, exists in the system and contributes to production, but its creation (in the past) lies outside the domain of the analyst. Yet, if a hand- loom is replaced by a power loom (capital), the energy required to operate (and also to make) the power loom is taken into account explicitly. In other words, economic theory does not count the food, clothing, housing and other consumption by workers – nor their education and training – as part of the cost of production, although it does count the energy consumed by labor-saving machines in the production process. It also counts the costs of replacing worn out capital goods in the current period but not the cost of producing capital goods in earlier periods. The reason for this seeming inconsistency is that, in the economic paradigm, workers are consumers and they sell their labor for money to buy consumption goods, including food, clothing, housing, etc. To count output (consumption goods) as part of the cost of the output would thus be double counting, from the economic perspective. The different approaches taken by ecologists and economists reflect the fact that in an ecosystem – hence, in EQAS – energy (or exergy) may be stored as biomass, but there is no formal role for either labor or produced capital as formal agents (or factors) of production. Ecologists, including Odum, may speak of natural capital, to be sure but not with any rigor. The soil and the humus are a kind of capital goods for a forest (but so are the trees). In a marine ecosystem, the water, sediments and dissolved nutrients would presumably be the analogs of capital. But, whereas in neoclassical economics capital is the result of purposeful savings and investment, neither the mineral soil nor the water are products of the ecosystem. They are, more precisely, the substrate. The organic content of the soil (humus) is actually a kind of waste product. In fact, it is worth emphasizing that ecosystems are by no means perfect recyclers, as many lay environmentalists appear to believe. Many economically important natural resources are accumulations of biological wastes left over from the past. Coal and petroleum are the most obvious examples. Elemental sulfur in hydrocarbon deposits is also of biological origin. The oxygen in the atmosphere is a residue of the photosynthesis process. Iron ore is a leftover from the oxidation of the ferrous iron formerly dissolved in the oceans; chalk and limestone are leftover from the shells of tiny marine organisms. Phosphate rock may be a residue from millions of generations of sharks teeth. Only carbon, oxygen and nitrogen are recycled with near-perfect efficiency by the biosphere.5 Except for the wastes, a complex mature terrestrial ecosystem has no net product other than what is needed to replace natural losses (depreciation). All the fruits, nuts, leaves, etc. are consumed as food by other organisms, leaving only a residue of dead organic matter (DOM). An immature ecosystem may, of course, produce more of itself by accumulating biomass. To provide a consumable surplus for humans (considered, for purposes of argument, as external to the ecosystem) requires a combination of three strategies: (1) replacement of mature ecosystems by immature ones, (2) extreme simplification to eliminate competition from insects, and other biomass consumers and (3) intensive artificial fertilization to replace nutrients lost or embodied in exported plant products. In a certain sense, existing biomass in ecology is arguably analogous to produced capital in economics. But there is no concept in ecology analogous to labor in economics. A balanced local ecological production function would necessarily include solar energy, nutrients, air (or oxygen) and water as factors, along with living organisms (biomass) as capital. Growth occurs to the extent permitted by exogenous input flows. There is always one limiting factor, whether sunlight, water or some trace nutrient (Leibig's Law). R. U. Ayres On the life cycle metaphor: Where ecology and economics diverge October 31, 2002 Page 10

On the global scale, water (incorporating dissolved trace nutrients) CO2, nitrogen and oxygen are recycled quite efficiently via external reservoirs (the soil, hydrosphere, and atmosphere). Calcium, potassium, sulfur and phosphorus are recycled less efficiently. In effect this recycling involves several feedback loops between outputs and inputs. The biosphere as a whole is a set of partially closed feedback loops. But this means that production and consumption cannot be conceptually distinguished. This fundamental fact dominates the ecological view of economics. However, the real economic system cannot be characterized in this way. Even in an idealized future "industrial ecosystem" there is a fundamental distinction between inputs and outputs. Inputs are partly materials (and energy) and partly services. The materials may be recycled, but the economic system adds value to raw materials by refining, purifying, synthesizing new materials, shaping, forming and assembling components to create new artifacts. The value added in this whole process can be characterized as "embodied information".6 The output of an economic system as a whole is a heterogeneous collection of consumable goods and services, known in the aggregate as GNP. A small part of this product must be saved and reinvested to replace depreciated capital and to increase the capital stock. Labor is an input, but labor, per se, is not an output. Nor is consumption an input. While Say's (outmoded but oft-quoted) law asserted the "supply creates its own demand", there is no strict causal link between consumption of goods and labor supply. It is clearly understood that — ethical considerations apart — consumers need not work and workers need not consume all of what they produce. The distributional considerations lie outside the narrow domain of economics. Conceptually, labor-as-input is quite independent of consumption of output. The fact that humans require food and shelter, and that these are a part of the output of the economy because there is demand for them, is the only link. There is another fundamental difference between economics and ecology. In ecology, as in economics, there are producers and consumers. In an ecosystem the producers are almost exclusively plants, which produce biomass for their own use and some surplus that permits other organisms to live as parasites. Some of these other organisms provide essential local services to the plants, mainly by transporting seeds and pollen. The closest analog of an economic system is a colony of ants or termites or bees, with its specially bred "workers" which gather food and bring it back to the hive or nest. The hive resembles capital, at first glance. However, a colony of bees is not a closed ecosystem. It depends on the existence of nearby flowering plants that yield nectar. The bees, in turn, provide an essential service (pollination) for the plants. On the global scale, too, animals provide an essential service to plants by consuming oxygen, which would otherwise build up to toxic levels. Conversely, the plants produce the oxygen by capturing carbon from carbon dioxide. In general the animal world is parasitic on plants. True, some animal activities contribute to plant productivity. Earthworms cultivate the soil. Beavers trap and conserve water. Birds carry seeds from place to place and fertilize them. Bees pollinate plants. Still, despite the superficial resemblances to an economic system, none of these activities are `labor' in the economic sense. Pollination is not purposeful activity as far as the bee is concerned. Services may not be withheld. There is no bargaining. There is nothing in the ecological system playing the role of money or prices. What plants and animals do for each other (or to each other) is merely `behavior', not `voluntary exchange transactions'.

Evolution R. U. Ayres On the life cycle metaphor: Where ecology and economics diverge October 31, 2002 Page 11

The main (and crucial) difference between biological and economic perspectives on evolution can be summarized succinctly. Biological evolution is a very slow unconscious process driven by physical phenomena (e.g. mutation) and implemented by competitive reproductive strategies adapted to specific environmental `niches’. One of the deepest (and still unresolved) questions in evolutionary biology is whether there term `progress’ has any useful meaning in terms of enabling us (for instance) to forecast the future directions of evolutionary change. My own small contribution to this debate is to suggest that evolutionary progress corresponds to the accumulation of `useful (for survival) information’ in genomes [Ayres 1994a] . Of course the evolution of the biosphere has had an enormous impact on the atmosphere – beginning with the buildup of oxygen – and thence, by acidification, erosion, and other forces, of the physical environment. This, in turn, has influenced biological evolution. This introduces the notion of co-evolution and perhaps `Gaia’[Lovelock 1972; Lovelock 1979; Lovelock and Watson 1983; Lovelock 1988]. Economic evolution is, of course, much faster. Moreover, it is entirely driven by conscious human decisions bearing little resemblance to mutation and adjustment via population dynamics. The main similarity, at least from my perspective, is the fact that human evolution, too, is altering the environment drastically and perhaps irreversibly.

Conclusion

To recapitulate, despite the common prefix `eco' the analogy between ecology and economics has very limited value. There are a number of critical differences. In the first place, ecologists naturally treat energy (exergy) as a medium of exchange, whereas economists reject this idea. It is true that species and populations in ecosystems compete for resources and exchange exergy (biomass). They do perform services for each other. But these exchanges are involuntary. There is no bargaining nor are there any markets where voluntary exchanges between suppliers and consumers result in `market clearing' prices. If a population of organisms or an ecosystem is viewed as a producing unit, its output is more of itself (i.e. it reproduces itself) or some metabolic product or waste. The fact that a plant or animal product may be food for another organism within the system is confusingly incidental to the main point, which is that an ecosystem in nature generates no net product. Humans are able to increase their take by simplifying the system (i.e. reducing biodiversity) and eliminating competitors. But the resulting managed agricultural system has little resemblance to a natural ecosystem and is likely to be unstable against external perturbations.. There is no role in ecology for `labor' in the economic sense. In ecology there is no direct payment for services in either direction. In ecology, biomass has a triple role. It is an input (along with solar energy, air and water), it is capital and it is output. In economics, by contrast, capital may be produced by labor (and capital) but it is not the sole input. Labor is an input but not an output. Output is heterogeneous (i.e. GNP), and consumption is not closely or directly related to labor supply. These differences are crucial in terms of explaining growth and/or evolution. In biology the growth of a population is a function of its size and the available nutrients and/or insolation. The process can be characterized most simply as a positive feedback loop with a resource constraint. In economics growth is a far more complex process, with multiple feedbacks including a feedback loop between resource consumption, costs, prices and demand -- and the substitution of natural resources (exergy) for human labor. (There are also resource constraints, of course). R. U. Ayres On the life cycle metaphor: Where ecology and economics diverge October 31, 2002 Page 12

But the key point is the necessity to distinguish between capital assets (which produce without being transformed) and consumable flows, which are used up and must be replaced continuously. Above all, ecologists need to understand that productive labor — in the human sense — has no analog in ecology.

Endnotes

1. Originally coal was chosen as the numeraire, but this has since has been changed to solar energy, whence the term "solar eMergy".

2. One parallel with economic theory should be acknowledged here. The standard neoclassical economic model — which most ecologists reject with scorn — assumes a very similar principle, namely that humans always try to maximize something called `utility' which is defined in terms of a set of fixed preferences.

3. For a review of Soddy’s theory, see [Daly 1980]

4. Many ancient skills, such as chipping flint to make arrowheads or rubbing sticks together to make a fire are now mere curiosities. The more recent metalworking skills needed to make a Samurai sword are equally obsolete, as are the skills employed to illuminate vellum or parchment, or — still more recently — to knit a sweater.

5. Some organics are continuously sequestered in soil and marine sediments, but the sequestration is a minute fraction of the throughput. Moreover, microorganisms probably re-mobilize a large fraction of the DOM before it becomes unavailable.

6. An extensive discussion of this perspective can be found in my book Information, Entropy and Progress [Ayres 1994a].

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