56 (2006) 359–372 www.elsevier.com/locate/ecolecon ANALYSIS Concepts of efficiency in ecological economics: Sisyphus and the decision maker

Nigel Jollands *

New Zealand Centre for Ecological Economics, Massey University and Landcare Research Ltd, PO Box 11-052, Palmerston North, New Zealand Received 16 January 2004; received in revised form 19 November 2004; accepted 15 September 2005 Available online 18 November 2005

Abstract

Efficiency forms the bedrock of policy, planning and business approaches to sustainable development. But what do ecological economists mean by efficiency? In the use context, efficiency has a wide range of potential interpretations, from the ratio of work output/ inputs to Pareto efficiency. Despite the potential richness of the efficiency concept, in practice, efficiency is often narrowly conceived within disciplinary boundaries. This appears to be the case even in ecological economics, which purports to be dtransdisciplinaryT and pluralistic. Such narrow disciplinary perspectives essentially waste the richness of the efficiency concept. This wasting could mean ecological economists and decision-makers are destined to Sisyphean toil in the pursuit of sustainable development. This paper explores the efficiency concept and its interpretation. It then reviews ecological economic literature to find that there is much room for improvement in the way ecological economists apply efficiency. Finally, the paper presents a framework within which a truly ecological economic approach to efficiency can emerge. Armed with this framework, policy makers and planners should be better prepared to make decisions leading to sustainable development. D 2005 Elsevier B.V. All rights reserved.

Keywords: Efficiency; Policy analysis; Ecological economics; Ecological efficiency; Thermodynamic efficiency

1. Introduction luation is efficiency — leading to what Stein (2001) refers to as the dcult of efficiencyT.AsEpstein (1984, Decision criteria play an important part in the p. 10) states, beveryone wants government policy to policy and planning process (Patton and Sawicki, be dmore efficientT.Q 1993; Quade, 1982). One criterion that has tended to Examples of this efficiency cult abound. As a result dominate contemporary policy development and eva- of the continued call for the use of efficiency analysis in policy and planning, many texts have been written on the subject including: Williams and Anderson * Tel.: +64 6 3567174; fax: +64 6 3559230. (1975), Epstein (1984), Nagel (2001), and Leach E-mail address: [email protected]. and Steward (1982). Epstein (1984), in particular,

0921-8009/$ - see front matter D 2005 Elsevier B.V. All rights reserved. doi:10.1016/j.ecolecon.2005.09.014 360 N. Jollands / Ecological Economics 56 (2006) 359–372 advocates efficiency measures as an essential tool for ogical origins. The paper concludes by presenting policy evaluation because befficiency measurement a framework within which a multi-dimensional ap- can provide both external accountability and internal proach to efficiency can emerge. Armed with this accountability for local government performanceQ framework, policy makers and planners should be (Epstein, 1984 p. 10). Even the political scientist better placed to make decisions to enable society to Wildavsky (1966, p. 309–10), in his early critique of achieve the goal of sustainability. efficiency in policy analysis, acknowledges that bstudies based on efficiency criteria are much needed and increasingly useful.Q 2. The origins and meaning of efficiency dEfficiencyT plays an important role in the New Zealand policy context. The concept of efficiency is The English word defficiencyT is derived from the enshrined in several of New Zealand’s core statutes, Latin word defficientiaT, the present participle of the including the Resource Management Act (1991), the verb defficereT. dEfficereT means to bring about, Local Government Act (2002), the Energy Efficiency accomplish, execute or produce (Skeat, 1961). and Conservation Act (2000), and the State Sector Act According to Jollands and Patterson (2004), the inter- (1988), to name a few. Furthermore, efficiency is a pretation of efficiency evolved in two directions. Effi- core allocation criterion in many New Zealand ciency was used in a theological context to refer to the resource allocation activities (see, for example, Trans- action of an doperative agentT — God. This use of the fund New Zealand). The use of the efficiency criterion term is now generally obsolete. is also advocated in many government documents Efficiency also came to mean bfitness or power to (see, for example, Ministry for the Environment, accomplish, or success in accomplishing, the purpose 2000). intendedQ (Simpson and Weiner, 1989, p. 84). The The efficiency criterion is a potentially rich con- dfitness or power to accomplishT interpretation of cept, with a wide range of interpretations, from the efficiency was taken from theological themes and, in ratio of work output/energy inputs to Pareto effi- the context of the rationalist spirit of the Enlighten- ciency. However, in contemporary efficiency praxis, ment and the commercial activity of 18th century the concept is often narrowly conceived within dis- Europe, applied more widely to the transient world ciplinary boundaries. Such narrow perspectives essen- (Jollands, 2003). In doing so, the centre of gravity of tially waste the richness of the efficiency concept. the meaning of efficiency shifted from a theological This wasting can limit decision-makers’ ability to basis to a logical–positivist perspective. make ecologically sustainable decisions and can des- In this new approach to efficiency, the concept was tine decision-makers to Sisyphean1 toil in the pursuit increasingly applied to the dproductive machineT.In of such goals. 1827, Gilbert used the word efficiency in relation to This paper explores the efficiency concept and physics — the work done by a force in operating a its interpretation in ecological economics. Its pur- machine or engine (Simpson and Weiner, 1989). He pose is not to discuss the limitations of an effi- stated, btherefore a machine is efficient in producing ciency focus of which there are many as is pointed duty, or effect, in proportion to the force applied, out by Stein (2001) — rather, the point is that, multiplied into the space through which it acts, I given the of efficiency in policy rhetoric, propose to denominate this function ( f s)efficiency.Q policy practitioners should be familiar with the full Similarly, defficiencyT was used in relation to the range of efficiency concepts. I begin with a discus- dorganic machineT in biological literature as early as sion of the meaning of efficiency and its etymol- 1925 (Lotka, 1925). Efficiency also came to be commonly applied to the economics of resources and welfare. Fawcett 1 In Greek mythology, Sisyphus is the cruel King of Corinth who (cited in Simpson and Weiner, 1989) stated in is condemned forever to roll a rock up a hill in Hades only to have it b roll back down again upon nearing the top. The gods thought, with 1863 that nothing more powerfully promotes the some reason, that there is no more dreadful punishment than futile efficiency of labour than an of fertile and hopeless labour. land.Q The most widely used contemporary interpre- N. Jollands / Ecological Economics 56 (2006) 359–372 361 tation of economic efficiency is related to the work For example, classical thermodynamics was initi- of Vilfredo Pareto, whose work led to what is now ally preoccupied with increasing the efficiency of referred to as allocative efficiency or simply dPareto industrial-revolution machines (Khalil, 1990; Konde- efficiencyT — although, Pareto did not use the effi- pudi and Prigogine, 1998; O’Connor, 1994). The work ciency term himself. of Carnot and other early thermodynamicists has led to The term is now tied to the rationality of a an empirically precise definition of efficiency based on logical–positivist world view. In fact, rationality measures of physical, often observable, systems. Effi- and efficiency are often used synonymously, as ciency concepts within thermodynamics are all based Daly (1992a, p. 192) shows: bthis argument is raised on the same formulation: against economists who [argue that] ... intertem- poral allocation via discounting the future is the useful energy output rational (efficient) way to deal with provision for EfficiencyðÞg ¼ ð1Þ the futureQ (emphasis added). Interestingly, efficiency energy input has still retained a notional link to spiritual zeal. Along with concepts such as dproductivityT and Thermodynamic concepts of efficiency can be divided dusefulnessT in Western cultures, efficiency embodies into several groups: thermal efficiency, efficiency the Christian dogma of transcendence over nature based on ideal limits, finite-time efficiency and (White, 1967). energy-quality-adjusted efficiency measures. Since the 1800s and the wider application of the Likewise, in economics, resource depletion was an efficiency term, efficiency concepts have burgeoned. early feature of its research agenda (Jager et al., 2000). They now include technical efficiency, production Such a resource depletion focus naturally leads to a efficiency, profit efficiency, x-efficiency, allocative concern for the efficiency of resource use. As early as efficiency, scale efficiency, thermal and finite-time the Physiocrats, notions of the environment and effi- efficiency, managerial efficiency, dynamic efficiency, ciency of resource use were alluded to (Oser and ecological efficiency and many more. Given this Brue, 1988). potential range of concepts, Stein (2001) is at pains Efficiency remains a core concept of neoclassical to remind us that the modern efficiency concept is economics (Leibenstein, 1966), although efficiency in context-dependent. It embodies two aspects: dfitness economics is not a single notion, but rather a multi- or successT and dthe purpose intendedT. Both of these dimensional concept (Helm, 1988, p. 13). These many parts depend on the context. For example, what is interrelated efficiency concepts can be found in two success for one person may not be success for another. main bodies of theory: production theory (such as The yardstick of efficiency bis relative and rooted in technical efficiency, production efficiency, etc.) and contextQ (Stein, 2001, p. 12). welfare economics (such as allocative efficiency, intertemporal efficiency, etc.). adds yet more efficiency concepts to what 3. Efficiency in disciplinary contexts is already a crowded lexicon. Concern for efficiency in ecology theory has a shorter history than The term defficiencyT has come to represent a in thermodynamics or economics. According to Mar- multiplicity of meanings. As with the proverbial tinez-Alier (1987, p. 9), it was not until the mid-19th blind men and the elephant, any single interpretation century that ecologists came to consider the efficiency of efficiency is contextually bounded to a particular and transformation of energy by plants and animals as set of disciplinary and epistemological assumptions. a central question in their research. Lotka (1925) was Earlier work by Jollands and Patterson (2004) pro- among the first to apply the idea of efficiency directly vides insights into the efficiency concepts that to biological systems. Following thermodynamics, he emerge from several disciplines. They found that defined efficiency as the fraction of energy ( Q), con- efficiency has been a core focus of thermodynamics, verted into work (W). economics and ecology since the early days of these Perhaps the most important contribution to the disciplines. concept of ecological efficiency came from Raymond 362 N. Jollands / Ecological Economics 56 (2006) 359–372

Lindeman (1941, 1942). By applying energetic ana- than the qualitative and is therefore prone to the pars lysis, Lindeman extended Juday’s (1940) approach pro toto trap. into a more detailed analysis and definition of effi- The three disciplines covered above provide a rich ciency ratios. In particular, Lindeman defined ecolo- mix of efficiency concepts. Many of these concepts gical efficiency as: can be used to guide policy. For example, New Zeal- and’s Energy Efficiency and Conservation Authority’s EfficiencyðÞg Minimum Energy Performance Standards (MEPS) policy focuses on improving the thermal efficiency secondary consumers ðor producersÞ of appliances to enhance economic performance and ¼ ð2Þ primary consumers ðor producersÞ welfare. Several efficiency concepts could have been brought to bear on this issue including thermodyna- Discussion of efficiency concepts in ecological mic’s thermal efficiency, ecology’s maximum power literature can be grouped into three areas: Eugene principle (to guide policy makers on the trade off Odum’s (1959) defficiency between and within trophic between efficiency levels and machine operation), levelsT, Howard Odum’s (1971, 1996) transformity production efficiency and allocative efficiency. Unfor- and the maximum power principle (Odum and Pin- tunately, the policy debate was dominated by alloca- kerton, 1955). tive efficiency considerations. While allocative Care must be taken when using concepts from efficiency may provide useful insights into the any disciplinary perspective because of the under- MEPS options, the disregard for other perspectives lying assumptions. For example, classical thermody- means that policy makers lose the potential richness of namic interpretations of efficiency are a product of perspectives that can be afforded by other efficiency the discipline’s assumption that systems determinis- concepts. tically tend toward equilibrium (Khalil, 1990). In an dequilibrial worldT, efficiency is assumed to con- verge on a unique final value through the relentless 4. Ecological economic approaches to efficiency march towards equilibrium. Since non-equilibrium systems are ubiquitous in nature, application of Another emerging field of enquiry relevant to a classical thermodynamic equilibrium-based concepts discussion of efficiency is ecological economics, of efficiency must be treated carefully. which claims to take a dtransdisciplinaryT and Similarly, neoclassical economics (and by implica- dpluralisticT approach to sustainable development tion its conception of efficiency) has been criticised (Costanza et al., 1991; Norgaard, 1989; Sahu and because of its mechanistic and deterministic view of Nayak, 1994). Because of this pluralistic approach, the economic system (So¨llner, 1997). Neoclassical one would expect an application of a wide range of economics assumes that given the right conditions, efficiency concepts. However, a closer examination of the market machine will inevitably and instantly the way ecological economists use efficiency reveals achieve equilibrium levels of efficiency in its many that they are some way from this goal. The work of guises. There is, however, little empirical evidence many ecological economists reflects the current policy that economic systems tend deterministically towards preoccupation with allocative efficiency. equilibrium. Instead, we see an economy charac- terised by bnon-equilibrium (and) self-reinforcing 4.1. The role of efficiency in Ecological Economics behaviourQ (Christensen, 1991 p. 75). An perspective of efficiency is Efficiency concepts play a vital role in contempor- firmly rooted in what Wiegert (1988) refers to as ary ecological economic theory. The basic worldview decological energeticT; that is, a focus on energy of ecological economics is that the world economy’s flows through the ecosystem. This approach is lim- denergy and material resource baseT is limited (Cost- ited in several ways: (1) it can ignore some of the anza et al., 1991). From this biophysical perspective complex interrelationships (such as interspecies rela- flows the directive for efficient use of low-entropy tionships); (2) it emphasises the quantitative, rather energy and material resources. Ecological economics N. Jollands / Ecological Economics 56 (2006) 359–372 363 identifies efficiency of resource use as an important (volumes 1 through 42) that discuss efficiency2 pro- strategy to achieve sustainable development (Ayres vides useful insights in this regard. Analysis of and Nair, 1984; Templet, 2001). For example, Tem- these papers indicates that there is a divergence plet (1999, p. 223) states that bsustainability is between ecological economic theory and revealed enhanced by strategies which promote... resource practice when it comes to efficiency. Taken use efficiency in economic systems.Q together, the 91 papers cover an appropriately eclec- However, ecological economic literature clearly tic range of efficiency concepts, from allocative and states that efficiency should not be considered the x-efficiency to ecological and -conversion effi- sine qua non of sustainable development for two related ciency. However, this aggregate view is misleading. reasons. First, befficiency is subject to thermodynamic Ecological economic literature is dominated by limitsQ (Daly, 1992a, p. 24). Second, efficiency faces applications of economic efficiency concepts (70% dsocial limitsT. Efficiency is wholly inadequate to of the 91 articles reviewed) and allocative efficiency address issues of scale and distribution, which depend in particular (51% of all 91 articles) (see Fig. 1). on ecological realities, and on social, political and In fact, 33 of all of the articles applied the allocative ethical principles respectively. Ecological economic efficiency concept in isolation of other efficiency con- literature asserts that efficiency should not be consid- cepts or wider social, ecological or thermodynamic ered in isolation (Daly, 1992a; Norgaard and Howarth, considerations. These articles present research that is 1992). Daly (1996, p. 219) argues that efficiency essentially indistinguishable from neoclassical eco- (coupled with sufficiency, equity and sustainability) nomic analyses. Thermodynamic-related efficiency needs to become part of a new dcentral organising concepts (energy efficiency and recycling efficiency principleT to replace dgrowth maniaT. Ecological eco- categories in above) were applied in approximately nomic theory saves an important place at the sustain- 20% of the articles. However, most of these articles able development table for efficiency-enhancing addressed issues of energy efficiency from a thermal- strategies. However, efficiency in itself is not regarded efficiency perspective. Only three articles actually as sufficient to achieve sustainability goals. attempted to draw considerations into the ecological economic literature (Amir, 1994; Azar 4.2. Current usage of the efficiency concept in et al., 1996; Matutinovic, 2002). Few articles (10%) Ecological Economics drew on the ecological theory of efficiency. This is surprising given ecological economics’ putative Despite the important role of efficiency in ecolo- attempt to integrate ecological and economic theory. gical economic theory, little work has been done to Another interesting finding is that, despite ecolo- develop an ecological economic approach to effi- gical economics’ call for pluralism, only 11 articles ciency. The rhetoric of ecological economics suggests attempted to use more than one efficiency concept in that a theory of efficiency should: their analysis. Of these articles, five papers used only economic concepts (Aldy et al., 1998; Felder and ! focus on integrating ecological and economic the- Schleiniger, 2002; Khanna and Zilberman, 1997; ory; Regev et al., 1998; Ricker, 1997). The remaining ! be based on a biophysical perspective of eco- six papers drew on efficiency concepts from more nomic–environment interactions; than one discipline and could be regarded as ! take a systems perspective; dinterdisciplinaryT. It is in these latter six articles ! link efficiency concepts with sustainable devel- that we find at least one useful advance in the ecolo- opment; gical economic theory of efficiency. The work by ! be inter/transdisciplinary. Hannon (2001, 1998) presents an accounting frame- work that integrates ecological and economic theory Regardless of the rhetoric of ecological economics, and allows estimation of dtechnical system efficiencyT becological economics will, in the end, be what ecolo- gical economists doQ (Costanza, 1989, p. 2). A review 2 That is, those articles that mention efficiency in the keywords or of the 91 articles in the journal Ecological Economics abstract. 364 N. Jollands / Ecological Economics 56 (2006) 359–372

50 45 40 = economic concepts 35 30 = thermodynamic concepts 25 = ecological concepts 20 15 = mix of concepts or concepts Number of articles 10 not fitting into anyone discipline 5 0 Other Allocative x-efficiency Eco-efficiency Cost efficiency Energy efficiency System efficiency Land use efficiency Recycling efficiency Utilisation efficiency Ecological efficiency Production efficiency Efficiency in consumption

Fig. 1. Number of efficiency-related articles in the journal Ecological Economics (volumes 1 through 42) by type of efficiency concepta and disciplineb. aThe dotherT category includes articles on doverall efficiencyT, dabsolute efficiency of cars and busesT, defficiency of monitoring systemsT and defficient attribute combinationT. bNote that the number of efficiency concepts presented in this figure add up to more than the number of articles, because several articles mention more than one efficiency concept.

(see below). Unfortunately, neither Hannon’s, nor the outputsQ (Hannon, 2001, p. 23–24). Hannon calculates other five papers, appear to have received much this measure by considering what he calls flows of attention in ecological economic literature. birrecoverable stock or capital loss.Q These include Another concerning finding from the review is the flows like soil loss, diffusion of chemicals and metals lack of attention to defining efficiency in the reviewed and the radiation of high temperature energy to low- papers. Only 31% of the papers proffered a definition concentration energy that is lost from the economy. of the efficiency concept they used. Those that did not These unrecovered flows are classified as part of the offer a definition implicitly assumed the reader would total economic output, but not a part of net output. understand the specific efficiency concept under con- Thus, in the words of Hannon (2001, p. 23): sideration. This absence of efficiency definitions is bIf we were able to cast the entire set of net inputs of concerning because the range of efficiency concepts the combined system into monetary terms, the eco- that are available to ecological economists is poten- nomic value of the net output of the combined system tially far greater than in mono-disciplinary research. could be calculated. We could then value the lost net Without explicit definitions, there is considerable outputs of the economic system and categorise such room for confusion over what is actually meant by lost flows in the total system output measure, but not the specific efficiency concept used. the net output of the system. Thus, the monetised Finally, a clear finding of the review of articles is value of the combined system net output would be the lack of development of a uniquely ecological less than the monetised value of the net inputs.Q economic approach to efficiency. Hannon (2001) pre- sents one of the few attempts to develop a system- Using this approach, Hannon claims to have devel- wide efficiency concept. In his work on attempting to oped a technical efficiency concept that is: combine ecological and economic systems in an input–output framework, he proposes what he calls ! useful for measuring the effectiveness of reducing btechnical system efficiency.Q This efficiency is waste and the environmental impact of economic defined as bthe ratio of the monetised value of the activity; combined net input to the monetised value of the net ! consistent, without double counting. N. Jollands / Ecological Economics 56 (2006) 359–372 365

However, Hannon’s approach is limited in several articles and draw on Daly’s worked on the steady- important ways. First, Hannon (2001, p. 19) com- state economy. ments that bno single measure of the system... effi- ciency can be given for the combined system... until 4.3. Daly’s boverall ecological economic efficiencyQ the ecosystem metabolism is converted into economic concept terms.Q This statement is limiting. Efficiency measures commonly do include different units for the denomi- One of the few decological economicT approaches nator and numerator (see, for example, Patterson, to efficiency is that developed by Herman Daly 1996). Also, if Hannon is referring to the need to (1992b, 1996). In his work on the steady-state econ- commensurate ecological and economic components, omy concept, Daly attempted to meld ecological and the need for monetary units is not a given. Many other economic theory and, in doing so, provided a unique commensurating numeraires are available (such as insight into efficiency. Odum’s emjoules) and may be more appropriate, Daly paints a simplified picture of economy–envir- depending on purpose. onment interaction as summarised in Fig. 2. Daly’s Hannon’s reliance on monetary measures of eco- picture is based on the biophysical perspective of the system inputs and outputs is also concerning from two economy–environment interactions that form the bed- other perspectives. Peet (1992) argues compellingly rock of ecological economics. that some things may not be capable of valuation in Daly’s work on efficiency arises out of his critique terms of cash, or that they maybe priceless (i.e. have of neoclassical economic conceptions of efficiency. infinite value). Also, Hannon’s confidence in contin- Daly (1992b, p. 94) states that: gent valuation seems ill placed (see Blamey and bOur current notions of efficiency are grossly con- Common, 1994). fused. We usually measure only the efficiency of the Hannon’s approach is also methodologically fund factors, labor and capital (excluding complex and data hungry. Even if his approach goods). GNP divided by number of laborers or by was ideal, this complexity would likely limit the value of the stock of producer’s goods are the usual wider adoption of his efficiency concept. Finally, measures. GNP is a flow, reflecting mainly the flow of Hannon’s approach appears relatively narrowly throughput, an index expressed in value units, but focused on waste and consequent environmental measuring change in a flow of physical quantities. impacts. Thus the greater the flow of throughput (the faster In conclusion, it appears from this review of the depletion...) the higher is befficiency.Q In other articles in Ecological Economics that what ecologi- words, this notion of efficiency measures the efficiency cal economists ddoT with respect to efficiency leaves with which we destroy what is valuable!Q much to be desired. To find another potentially more methodologically rich ecological economic Daly draws on the dcoreT efficiency ratio of useful approach to efficiency, we must leave the journal outputs to inputs to define efficiency in a general

Depletion-Production

Solar Energy Economy Ecosystem Throughput (Stocks) Heat

Pollution-Depreciation

Service Flux of Service from Flux of Service from Natural Ecosystem Human Economy

Fig. 2. The concept of a steady-state economy (based on Daly, 1992b). 366 N. Jollands / Ecological Economics 56 (2006) 359–372 sense as the ratio of services gained (useful output) to introduces the issue of distribution across society services sacrificed3 (inputs). More specifically, when as another aspect of this ratio. An increase in the applied to the interaction of the economy and the services gained from MK, would, ceteris paribus, environment, he draws on both ecological and eco- lead to an improvement in this service efficiency nomic theory and defines efficiency as: ratio. This ratio has received most attention from neoclassical economists. MK services gained 6 gDaly ¼ ð3Þ (b) Maintenance efficiency. This ratio reflects the NK services sacrificed durability of the manufactured capital stock. where MK is manufactured capital4 and NK is natural bWhile Ratio 1 measures the service intensity capital. Daly (1996, p. 84) refers to this ratio as per unit of time of the man-made stock, Ratio 2 boverall ecological economic efficiency.Q measures the number of units of time over which By means of an expanded identity, Daly decom- the stock yields that serviceQ (Daly, 1996, p. 85). poses (3) into four dimensions of This ratio essentially measures the turnover or renewal period of the manufactured stock. The MK services gained MK services gained ¼ more durable the stock, the less maintenance and NK services sacrificed MK stock replacement (or throughput) it needs. Maintenance MK stock efficiency is increased if the quantity of manufac- throughput tured capital increases while throughput is held constant. Similarly, this ratio is increased if throughput throughput decreases, ceteris paribus. This ratio NK stock could be considered analogous to Odum’s (1983) NK stock trophic-level production efficiency, ecological NK services sacrificed growth efficiency and assimilation efficiency ð4Þ ratios, because these measure stock growth per unit of energy input. In other words, Daly presents efficiency as a con- (c) Growth efficiency.7 This breflects the degree to cept with several interrelated dimensions. Each ratio which the ecosystem can maintain a supply of on the right-hand side of represents a different dimen- throughput on a sustainable basisQ (Daly, 1992b, sion of efficiency. These ratios listed from left to right p. 79). In other words, this ratio measures the in the Eq. (4) described as: efficiency of natural capital in yielding an incre- ment available for offtake as throughput. This (a) Service efficiency.5 This ratio measures the ser ratio is determined by the bintrinsic biological vice efficiency of manufactured capital stock. growth rate of the exploited population in its According to Daly (1996, p. 84) this ratio supporting ecosystemQ (Daly, 1996, p. 85). For depends on the technical efficiency of the product example, pine trees grow faster than mahogany, itself, on the allocative efficiency among different so in uses where either will do, pine is more product uses in conformity with individual pre- dgrowth efficientT. Daly’s growth efficiency ratio ferences and ability to pay, and distributive effi- could potentially accommodate Odum’s transfor- ciency among individuals. The first two concepts mity if throughput was measured in emjoules and are straightforward and conform to standard eco- NK stock was measured in joules. nomic welfare and production theories. Daly (d) Ecosystem service efficiency. This ratio bmeasures the amount of natural capital stock that can be 3 That is, input is considered an opportunity cost or the dsacrificed exploited for throughput (either as source or as benefit of the best alternative foregoneT. 4 Daly (1996) refers to this as man-made capital (MMK). In order to avoid Daly’s gender-specific term, MMK will be replaced by 6 Originally referred to by Daly (1992b) as dArtifact maintenance dmanufactured capitalT (MK). efficiency.T 5 Originally referred to by Daly (1992b) as dArtifact service 7 Originally referred to by Daly (1992b) as dEcosystem mainte- efficiency.T nance efficiency.T N. Jollands / Ecological Economics 56 (2006) 359–372 367

sink) per unit of other natural services sacrificedQ ! from the thermodynamicist’s gallery, energy-qual- (Daly, 1996, p. 86). This ratio addresses the ques- ity adjusted efficiency.8 tion bis the loss of ecosystem stocks allocated among parts of the ecosystem in such a way as to As a result, Daly’s work cannot be considered minimise the total loss of ecosystem services?Q sufficient in the context of ecological economics’ pur- (Daly, 1992b, p. 79). Ratio d is called decosystem suit of pluralism. service efficiencyT to reflect the minimisation of Another potential criticism of the Daly efficiency loss of other ecosystem services when a could be targeted at his use of terminology. In or ecosystem is exploited primarily for throughput. his book Beyond Growth (Daly, 1996) Daly refers to dnatural capitalT. This is interesting given that his A strength of Daly’s efficiency formulation is that earlier work on the subject (Daly, 1992b) had a stron- it captures several dimensions of the efficiency con- ger ecosystem service focus. For example, his overall cept. Taken together, these dimensions paint a richer efficiency ratio was initially defined as the ratio of picture of efficiency than Hannon’s dtechnical system bartifact services gained to ecosystem services efficiencyT. Furthermore, Daly’s approach extends sacrificed.Q It is difficult to understand why Daly beyond considering simply natural dresourcesT or changed his terminology — perhaps it belies the dcapitalT in an attempt to account for natural capital author’s economics background, or perhaps it was services (Ratio d). an attempt to make his work more accessible to an Daly also notes that all of these ratios meet con- economics audience? straints. For example, he suggests technology can As with the term dresourceT, dnatural capitalT con- increase all four ratios, bbut it confronts limits.Q Ratios notes natural goods with direct utilitarian benefits to b and c are limited by second-law constraints. Ratio a people. In the place of natural capital, ecological is limited by diminishing marginal utility and Ratio d economic theory has promoted the use of the ecosys- is limited by increasing marginal costs. tem-service concept. Daly (1996) still refers to eco- Despite Daly’s leading work in this area, ecological system services in his Ratio d, but he has diluted the economists have done little work to apply his con- ecosystem service dimension. A more appropriate cepts or develop his ideas further (with the notable formulation of his efficiency model would see NK exception of Lawn, 2003). Perhaps this is because, replaced by decosystem servicesT. while Daly’s (1992b) exposition of efficiency is From a production function perspective, Daly’s appealing, it has several limitations. Daly’s apparent approach usefully extends the standard production attempt to provide a definitive interpretation of effi- function, which subsumes natural capital (NK) within ciency raises a conceptual tension with ecological the economy along with labour (L) and manufactured economic theory. On one hand, ecological economic capital (K)asinFig. 3. theory promotes dpluralismT. On the other, Daly’s Daly emphasises the importance of natural capital approach could be construed as a prescriptive ecolo- services and the economy’s dependence on these gical economic definition of efficiency. To be fair to services. Consequently, he implicitly redraws the pro- Daly, he does not present his efficiency concepts as duction function to resemble something like Fig. 3. such a fait accompli. He acknowledges that bthe world However, Daly’s ratios do not explicitly account for is complex, and no single identity can capture every- labour inputs. thingQ (Daly, 1996, p. 86). This caveat is important in A further difficulty arises with Daly’s ratios; how the context of pluralism because although Daly’s for- to address the tradeoffs that will inevitably arise mulation is extensive in its coverage, there are several between the various efficiency dimensions? For exam- efficiency concepts that it does not accommodate. ple, the durability of UPVC weatherboard homes may These include: be greater than wooden cladding for houses (and, therefore, of greater maintenance efficiency than woo- ! from the ecologist’s palette, input efficiency; ! from the economist’s palette, profit efficiency and 8 Although perhaps Daly could argue that, if his ratios were x-efficiency; measured in energy terms, they could account for energy quality. 368 N. Jollands / Ecological Economics 56 (2006) 359–372

The economy

K MK services L Production (a) ($) NK

The economy K

NK L Production MK services (b) services ($)

Fig. 3. Diagrammatic representation of (a) the standard economic production function and (b) Daly’s implicit production function including NK services. den cladding). But UPVC is made from non-renew- ! linking efficiency concepts with sustainable devel- able resources and has poorer maintenance efficiency opment; than wooden cladding. Daly’s doverall ecological ! an interdisciplinary approach. efficiencyT formulation provides no guidance on how to decide between these tradeoffs. Such a framework is the subject of the next section. Finally, the measurement of some of Daly’s ratios is problematic. For example, Daly is unclear how dservicesT would be quantified or how the various 5. Towards an ecological economics framework for dNK stocksT would be commensurated. efficiency To conclude this discussion, Daly has presented one of the few attempts to refine an ecological economic The following discussion presents an efficiency perspective of efficiency, but it is limited in several framework that attempts to clearly define an ecolo- important ways. Daly’s formulation of efficiency is not gical economic perspective of the role and place of necessarily the ecological economic interpretation. efficiency in decision-making. The implications of Given ecological economics’ aim to move towards this framework are important. The framework does pluralism, it would seem that uniquely defining effi- not aim to show where economists’ interpretations of ciency using Daly’s approach is inappropriate, despite efficiency are right and ecologists’ and thermodyna- the merits of his particular method. Thus, because of micists’ are wrong, or vice versa. Each of these ecological economics’ pluralistic tendencies, it is inap- disciplines takes the core meaning of efficiency, propriate to define an doverarchingT theory of effi- surrounds it with different assumptions and applies ciency in ecological economics. Rather, ecological it to different areas of interest. Instead of seeing this economic notions of efficiency are appropriately multiplicity of assumptions as a problem, this frame- drawn from the core disciplines of ecology, thermo- work (presented below) views this diversity as an dynamics and economics and would emphasise: asset.

! drawing together ecological and economic theory; 5.1. A three-tiered framework ! a biophysical perspective of economic–environ- ment interactions; Efficiency is a necessary but not sufficient con- ! a systems perspective; dition for improving sustainability (Templet, 2001, N. Jollands / Ecological Economics 56 (2006) 359–372 369 p. 459). That is, progress towards sustainable 5.1.1. The first tier: biophysical context development will inevitably require an improve- Consistent with Daly’s model, the first tier neces- ment in the efficiency of ecosystem service use. sarily involves a consideration of biophysical scale. However, improving efficiency alone will not However, following Adger et al. (2003), we refer to achieve the sustainable nirvana. Using efficiency this as biophysical context. We define biophysical concepts alone cannot help distinguish between context as those aspects of the physical environment sustainable and unsustainable resource allocations. that shape and ultimately limit human society. This Because of these limits to efficiency’s ability to term, biophysical context, extends beyond energy and contribute to sustainable development, it is impor- material flows (Daly’s scale) to encompass other tant to embed efficiency within broader considera- influences such as climatic conditions, geology and tions. In particular, it is suggested that the goals of geography. Biophysical context is superior to, but sustainable biophysical scale (Daly, 1992a,b) and interacts with, goals set in tier 2. social agenda (Adger et al., 2003) need to be The issue of biophysical context is fundamentally considered when making decisions. It is also neces- different from social contextual issues in tier 2. While sary to consider efficiency considerations alongside decisions about how people use and interact with the other decision criteria such as effectiveness, equity environment are decided by social processes, they and legitimacy (Alger et al., 2003). Three relevant must reflect physical limitations (Daly, 1992a,b). Bio- approaches to accommodating these aspects are physical context is inescapable (Costanza et al., 1991; found in the literature (Daly, 1992a,b; Norton et Hardin, 1991; Daly, 1996). For example, Daly illus- al., 1998; Adger et al., 2003). In order to develop trates the fundamental nature of scale effects with a a workable framework for efficiency, it is useful to nautical plimsoll line analogy. The plimsoll line indi- combine insights from all three models (refer to cates how well weight has been arranged on board a Fig. 4). ship to keep the ship level. Even if you load the boat

Fig. 4. A depiction of the three-tiered framework for ecological economics, with defficiency spaceT (tier 3) being embedded within the ddecision spaceT. 370 N. Jollands / Ecological Economics 56 (2006) 359–372 so that it keeps perfectly level, it still sinks if you the decision criteria and action. That is, decision- simply load it with too much cargo. Similarly, the making is interactive. The model needs to acknowl- economy may be succeeding with social goals, but edge the movement back and forth between an exam- it can still dsinkT because it has exhausted the limited ination of biophysical context and the decision space, physical resources from the environment on which it and the likely outcomes of those decisions. This is depends. Other issues within the first tier of Norton et indicated by the arrows in Fig. 4. al.’s (1998) model, such as the type of governmental structure or the mode of healthcare provision, are less 5.1.3. The third tier: the efficiency space dependent on ecological limits and must be relegated Efficiency concepts are used to assist decision- to the second tier. making in tier 2. I use the third tier to provide greater resolution to the decision criterion of interest: effi- 5.1.2. The second tier: the decision space ciency. Whether it be for a simple machine or a more The dsecond tierT is subordinate to considerations of complex systems, understanding efficiency can help biophysical context. Adger et al. (2003) argues that the decision-makers identify where, if at all, changes to dsecond tierT is permeated by social context in recogni- the system of interest should occur. However, effi- tion that social context also shapes decision-making. ciency cannot be used as a decision criterion in iso- Social context, in this paper, includes the size and lation, nor will it be appropriate to use the efficiency character of groups affected by the decision, homo- criterion in all circumstances. Locating efficiency as geneity or heterogeneity of the groups and its external one criterion within the second tier is useful because it coalitions, and the nature of institutions and social highlights the limitations of efficiency as a decision relations. The second tier is defined as the decision tool, as well as the trade-offs, the necessary hierarchy space because it is within this tier that decision criteria and the complexity of decision-making involved in are applied to problems with the aim of reaching a economy–environment interactions. solution. According to Adger et al. (2003), four deci- Efficiency concepts are context dependent (Stein, sion criteria need to be addressed simultaneously to a 2001. That is, efficiency depends on the disciplinary broad-based approach to environmental decisions: perspective and the nature of the system under consid- eration. The efficiency concept chosen to assist deci- ! efficiency; sion-making also depends on the analytical purpose. ! effectiveness, which relates to the capacity of a For example, if the purpose of the analysis is to provide decision or alternative to achieve its expressed information on the efficiency of a thermal electricity objectives; generation plant, then the thermal efficiency analysis ! equity, which tends to focus on the distributional may suffice. If, however, the purpose is to inform on the justice or consequences of decisions; and appropriate allocation of resources within a factor, then ! legitimacy, which relates to procedural justice and production efficiency would be more appropriate. the extent to which decisions are acceptable to Efficiency concepts are linked in two fundamental participants. ways. Firstly, they are epistemologically linked. That is, many, if not all, concepts can find a common root in the Although this paper is concerned with efficiency, thermodynamic expression of thermal efficiency. Thus, all four criteria are presented in the decision space to we find that efficiency concepts in economic production highlight two points. First, that efficiency alone can- theory are analogous to thermal efficiency, etc. Sec- not be used as a decision criterion. Second, to point ondly, efficiency concepts are linked because of the out that when making decisions, there will inevitably inescapable connectedness of economic–ecological sys- be trade-offs between the criteria. For example, when tems. As a result, any changes (to efficiency) in one part comparing an option that is highly efficient, but not of the system will likely have flow-on effects and influ- effective, with one that has poor efficiency but is ence other (aspects of efficiency and) parts of the sys- highly effective. tem. For example, a change in the thermal efficiency of a Finally, following Norton et al. (1998), it is impor- piece of equipment in a factory will mean less is spent on tant to note that reflective goal setting overlays both energy (improved cost efficiency), allowing resources to N. Jollands / Ecological Economics 56 (2006) 359–372 371 be reallocated, potentially leading to greater allocative References efficiency. For these reasons, it is important for multiple concepts of efficiency to be employed when making Adger, W.N., Brown, K., Fairbass, J., Jordan, A., Paavola, J., decisions on policy interventions. Rosendo, S., Seyfang, G., 2003. Governance for sustainability: Because of the context-dependent interlinked nature towards a ‘thick’ analysis of environmental decisionmaking. Environment and Planning A 35, 1095–1110. of efficiency, the efficiency sphere is not tied to one Aldy, J., Hrubovcak, J., Vasavada, U., 1998. The role of technology efficiency concept. 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