Assessing economic potential:
What the physical sciences have to offer
Jane King   (Resource Use Institute, UK)

Perhaps one of the gaps in traditional economics teaching has been the failure to
incorporate physical science into economic analysis. Economists have traditionally been
wary of intervention by outsiders. Scientists, for their part, have tended to leave analysis
of the economy to those trained in economic techniques. Economics and Science rest
on different paradigms. However co-ordination between the two can offer new insights in
a situation where economic development is increasingly coming up against physical
constraints whether in terms of limited resources, such as oil, water or fish, or of the
amounts and nature of pollutants we exude.¹  I am one of a growing number of people
who believe that economics urgently needs to find a way of dealing with these physical
realities. But to do so, it will have to innovate in a fundamental way: it will have to use, in
addition to monetary evaluation, a system of physical evaluation.

Money and energy: two units of account
In an unconstrained world the appropriate unit of account for economic analysis would
undoubtedly remain that superb concept already devised to assign values and preferences
within a given range of economic possibilities - namely money.  The drawback is that in
looking into the future, and in particular the long-term future, estimates have to be made of
the evolution of monetary value; and as we all know in the case of projected oil prices, such
estimates can be notoriously misleading. Indeed they can in certain cases even lead one
beyond the range of theoretical physical possibility.   Monetary evaluation is admirably
suited to analysing past economic behaviour or to evaluating short-term trends, but it
cannot be relied on for exploring economic potential with a longer time horizon. 

 An alternative numeraire is offered through Natural Capital Accounting (NCA), an approach
based on physical principles.²  NCA reflects the fact that production or  delivery of a service,
is a process of reducing the entropy of the set of components that go to produce the final
product;  an inevitable conclusion from the second law of thermodynamics.

It follows that in order to reduce the entropy of a system, somewhere else there has to be
a sacrifice of negative entropy of at least equal magnitude. In practical terms that sacrifice
is the effort involved  in terms of the energy required to create the inputs well as the fuel
needed to operate the economy. In other words the dissipation of a non-renewable resource.
Output is thus quantitatively linked to input as a causal relationship. Production can only
occur if the necessary inputs are physically available. Significantly the different linkages do
not vary over time, give or take a certain amount of technological improvement.

Modelling the economy in physical terms
Natural Capital Accounting can be articulated through the generic model known as ECCO
(Evaluation of Capital Creation Options) and can be applied with appropriate modifications
to different regions or countries (a world ECCO model also exists).  It should be made clear
that rather than conflicting with established economic approaches ECCO in fact complements
them. Its purpose is not to explore the collective economic behaviour of individuals in a
somewhat different manner from the traditional, but to determine the physical potential for
growth of the economic system as a whole. That potential will depend on the policies imposed
on the model by the user  which might, for example be the outcome of an econometric forecast.
It cannot be denied that what is not physically possible can never be economically possible.

This is not the place to give an exhaustive description of the structure and application of
ECCO, for which refer to www.eccosim.org.uk Briefly, it is a holistic dynamic simulation
model of an economic system. The potential supply of human-made capital is set against
the demands implicit in the user's policies. All transformations (such as the formation of
physical capital) require a reduction in entropy. That reduction is measured in terms of the
consumption of depletable natural capital expressed in energy units of standard quality. It
follows that a unit of human-made capital produced may then be quantified in terms of the
energy embodied in it.

A useful aspect of Natural Capital Accounting models is that assumptions do not have to be
made about economic growth rates. Potential growth rates evolve from the models themselves
according to the policies imposed on them by the model user. If sufficient human-made capital
cannot be created to meet demands, then something within the system will ultimately give.

By way of example the following sectors are included in a current European model.

•  Manufacturing
•  Construction
•  Market services to industry
•  Market Services to people
•  Non-market services (government - health - education)
•  Non-energy physical resource extraction
•  Fossil-energy extraction by type - coal, lignite, natural gas, oil
•  Electricity generation by type - nuclear, coal, natural gas, hydro, other
•  Domestic housing
•  Transport - roads, rail, air & infrastructure
•  Consumption - consumer goods, services, transport, fuels
•  Agriculture, forestry and fishing
•  Water
•  Capital transfers (external to EU), balance of international payments
•  Internal and external debt
•  Income re-distribution (pensions, benefits), average (EU-wide) taxation
•  Environmental significant outputs - CO2, SO2
•  Employment - by different sectors.
  
  

The application of Natural Capital Accounting
The purpose of Ecco models is not to forecast the behaviour of the economy but rather to
determine whether the economic objectives set by decision makers can lead to the desired
results, and what trade-offs may thereby ensue. Given that ECCO is not  an optimisation
model, there is never any unique solution.  The model provides many indicators which may
be selected as criteria of success. It is up to the user to decide which. Seeking an
acceptable outcome is an iterative procedure. 

Many of the policies explored by ECCO models relate to the environment, but by no means
all. A few are given by way of example.

• How fast is it possible to develop an alternative energy regime in view of declining
  supplies of fossil-based fuels?  To what extent would the material quality of life be
  affected?
• Is it possible to sustain the economy in the future without nuclear energy?
• What is the effect, in terms of resource use, of different modifications to the
  transport system
• What are the implications for the economy of attempting to meet the Kyoto and
  subsequent
  agreements on limiting CO2 emissions?
• How fast and for how long can the material standard of living be increased
• What is the effect on the economy of  demographic growth rates

There is much talk today about the over-compartmentalisation of knowledge and the need for
"interdisciplinarity". How different the world was two centuries ago. In the Edinburgh of that time
Adam Smith,  David Hume the philosopher and James Hutton the geologist, met in the street,
dined and argued together. In Paris Voltaire, de Bourgainville, the explorer, Fourier, the
mathematician and Lavoisier the chemist all lived in a Paris that was then a compact city.
They shared each other's  knowledge and wisdom.  Today not one of us can absorb the huge
body of skills and understanding that has been built up in these last centuries. However what
we can do, indeed must do, is to link up the relevant parts of economics and science within a
single system  including both the economy and the biosphere within which it operates.

Notes
1. Crane, D.C. Balancing pollutant emissions and economic growth in a physically conservative world, Ecological
Economics, 1996,16, pp 257-268
2. Slesser, M &King, J 'Not By Money Alone: Economics as nature intended' , ISBN 1-897766-72-6, Jon Carpenter
Publishing, Oxford, 2002
_____________________________
*Jane King may be contacted at  king@rui.co.uk or kingslesser@btinternet.com

SUGGESTED CITATION:
Jane King, "Assessing economic potential: what the physical sciences have to offer", post-autistic economics
review, issue no. 14, June 21, 2002, article 2. http://www.btinternet.com/~pae_news/review/issue14.htm