Emergy and Economic Value

EMERGY SYNTHESIS 4: Theory and Applications of the Emergy Methodology Proceedings from the Fourth Biennial Emergy Conference, Gainesville, Florida Edited by Mark T. Brown University of Florida Gainesville, Florida Managing Editor Eliana Bardi Alachua County EPD, Gainesville, Florida Associate Editors Daniel E. Campbell US EPA Narragansett, Rhode Island Shu-Li Haung National Taipei University Taipei, Taiwan Enrique Ortega Centre for Sustainable Agriculture Uppsala, Sweden Torbjorn Rydberg Centre for Sustainable Agriculture Uppsala, Sweden David Tilley University of Maryland College Park, Maryland Sergio Ulgiati University of Siena Siena, Italy December 2007 The Center for Environmental Policy Department of Environmental Engineering Sciences University of Florida Gainesville, FL ii 24 Emergy and Economic Value Daniel E. Campbell and Tingting Cai ABSTRACT The value of an item in an environmental system can be determined from two independent perspectives: (1) the perspective of the donor which determines what was required to produce the item and (2) the perspective of the receiver which determines what the person that receives the item is willing to pay for it. These two perspectives give complementary views of the process of valuation, one from the objective basis of input accounting and the other from the subjective basis of human preference. Emergy provides a comprehensive measure for input accounting, whereas, money is a universal measure for human preference. For economic and emergy determinations of value to be used together in a unified analysis, an understanding of the relationship between value as determined by each method is needed. In this paper, we translated economic axioms and laws into Energy Systems Language and used the resulting structural and functional analogies to gain an understanding of the relationship between economic and emergy methods of determining value. We assembled and interpreted data to show the environmental and human service work contributions to the value of products derived from forest resources. These work contributions were aggregated by sector along an economic production chain. A general relationship between the market value of a product in dollars and its emdollar value was proposed and tested using data on the U.S. forest products industry in the early 1990s. The study results indicate that there is a firm basis for using emergy methods to augment and improve current methods of valuing environmental and economic products. INTRODUCTION Value is defined as the amount of one thing that is considered to be a suitable equivalent for something else. The difficulty in assigning value to disparate things is to determine how much of one thing is truly equivalent to something that is very different in its nature and effects. In economics value is a fair price or return for goods and services when exchanged for money and money is used to determine the equivalences based on the relative willingness of the buyers to pay and the sellers to accept payment for the two things. An alternative method for determining the equivalence between any two things is to account for the inputs that were required for the production of each one. If the disparate required inputs can be converted to a common unit, direct equivalents among different things can be determined by summing all major inputs to their respective production processes. Perhaps the best known theory of value based on required inputs is Marx’s labor theory of value (Odum and Scienceman 2005). It is now well-known that Marx’s labor theory of value is incomplete, because the production of goods and services depends on many inputs in addition to labor. Odum (1987, 1988, 1996) presented the concept of emergy, which allows the development of a general theory of value based on inventorying all the inputs to production processes and then converting them first to energy (J) or matter (g) and then to emergy (sej) by multiplying the energy values by the appropriate transformity (sej/J) or the mass values by the appropriate specific emergy (sej/g). -24.1- Chapter 24. Emergy and Economic Value Thus, the question of finding the value of an item in an environmental system can be approached from two independent perspectives: (1) the perspective of the donor which determines what was required to produce the item and (2) the perspective of the receiver which determines the money that the person who receives the item is willing to pay for it. These two perspectives result in separate but complementary methods of valuation, one from the objective basis of input accounting and the other from the subjective basis of human preference. Emergy provides a comprehensive measure for input accounting and money is the universal measure for human preference. Faced with the same problem, the emergy synthesis and economic approaches would use the same data (labor and material costs and quantities) and methods (comparison of alternatives, maximization of decision variables, and determining the effects of a marginal change in those variables on a master variable) but they employ inherently different measures of value to reach a conclusion. Given that these two methods of determining value will always provide independent perspectives on worth, the question becomes, “How are the values determined using these two approaches related to one another?” If we can answer this question we may begin to see how we can use economic and energy methods within a single unified approach to valuation. At present, we can say that where the results of these two methods correspond, managers can have greater confidence in their decisions; where they differ managers are forewarned that more analysis may be needed. AN ENERGY SYSTEMS VIEW OF ECONOMICS Since the transformation of potential energy is the underlying cause of action in all known systems, methods grounded in thermodynamics such as Energy Systems Theory (Odum 1983, 1994) can be applied to gain a deeper understanding of the principles and axioms of many disciplines. The general axioms of a discipline that have been proven to be valid through testing against observed phenomena should be consistent with the laws of thermodynamics, sensu lato, including the 4th and 5th laws as proposed by Lotka (1922) and Odum (1996). Furthermore, we should be able to represent and identify these thermodynamic design principles by translating ideas from other disciplines into an energy systems model of the system. In this way, it should be possible to understand and interpret the principles and analyses of economics, as well as, other disciplines in terms of the thermodynamic and general systems principles codified in Energy Systems Theory (Odum 1994). However, it may not be possible to represent all the features of an energy systems model using the axioms of a particular discipline, when those axioms do not include all the principles needed to describe the system from a thermodynamic point of view, e.g., the lack of self-consistent conservation and entropic principles in economics (Mirowski 1989). Many economists have found it difficult to understand the value added by interpreting economics from the viewpoint of the natural sciences and particularly from the perspective of Energy Systems Theory. However, in this paper when economic laws and axioms are examined from the energy systems point of view (see Results and Discussion), they are found to be logically interpretable in terms of energy systems principles and the thermodynamic laws sensu lato. This gives us a common basis for approaching the important problem of determining value in environmental systems, i.e., systems that include major storages and flows of matter, energy, and information of both human and ecological origin. In particular, in this paper we will elucidate the relationship between value as determined by market economics and value as determined by emergy accounting methods. THE PHILOSOPHICAL BASIS FOR ECONOMIC VALUE It is well-known that money is only paid to people for the work that they do in making a product or in performing a service. Thus, dollars are paid to people for their service in extracting a mineral from the ground, refining it, and transporting it to a place where it is used in the manufacture of an item, but no money is paid to the environment for the work done to produce the mineral ore in the first place. It is obvious that none of the human services generating income from this mineral -24.2- Chapter 24. Emergy and Economic Value would be possible without the concentration of the mineral in an ore body that could be exploited, yet markets attribute all value to human activities and none to the work of the environment. The notion in economics that all value derives from human work and none from the work of nature can be traced to the writings of John Locke (Gates 1998). Locke stated the following in his Chapter “On Property” in “Two Treatises of Government” published in 1764. “Though the earth, and all inferior creatures, be common to all men, yet every man has a property in his own person: this no body has a right to but himself. The labor of his body, and the work of his hands, we may say are properly his. Whatsoever then he removes out of the state that nature hath provided, and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property. It being by him removed from the common state nature hath placed it in, it hath by this labour something annexed to it, that excludes the common right of other men: for this labour being the unquestionable property of the labourer no man but he can have a right to what that is once joined to,” Thus, the implication from this passage in Locke is that nature’s work alone has no value rather value is created when human beings operate on nature; therefore, all value derives from human work and payment should then be made only to humans for creating value.

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