Alessandro Vercelli

Sustainability : dynamics and uncertainty

Section 1 Overview: interpreting Sustainability, G. Heal global environmental risks, G. Chichilnisky, G. Heal. Section 2 Dynamics: sustainable use of renewable resources, A. Beltratti, et al north south trade and the dynamics of the environment, R. Abraham, et al trade, migration and the environment - a general equilibrium analysis, G. Chichilnisky, M. Di Matteo a simple model of optimal sustainable growth, G. Cazzavillan, I. Musu environmental externalities disconnected generations and policy, G. Marini, P. Scaramozzino stochastic sustainability, M.P. Tucci sustainability of economics development and the freedom of future generations, A. Vercelli. Section 3 Uncertainty: hard uncertainty and environmental policy, A. Vercelli environmental option values, uncertainty aversion and learning, M. Basili, A. Vercelli environmental bonds - a critical assessment, L. Torsello, A. Vercelli uncertain future preferences and conservation, G. Heal, et al catastrophe futures - financial markets and changing climate risks, G. Chichilnisky, G. Heal stochastic sustainability in the presence of unknown parameters, M.P. Tucci climate change and emission permits, A. Beltratti.

HAPPINESS AND HEALTH: TWO PARADOXES

Abstract This paper aims to establish systematic relationships between the two rapidly growing research streams on the socio‐economic determinants of happiness and health. Although they have been pursued quite independently by different communities of researchers, empirical evidence points to very similar underlying causal mechanisms. In particular, in both cases per capita income seems to play a major role only up to a very low threshold, beyond which relative income and other relational factors become crucial for happiness and health. On the basis of these structural analogies, we argue that a process of cross‐fertilisation between these two research streams would contribute to their development by clarifying the relationship between happiness, health and their determinants. Finally, we observe that the two literatures have converging policy implications: measures meant to reduce poverty and inequality and invest in social and environmental capital may improve both health and happiness of the individuals.

Environment and economics

In the introduction to the special theme of the last issue of SCED, various approaches to structural and dynamic analysis were discussed, and responses to changes in parameters or exogenous variables were investigated. In that issue the emphasis was on the theoretical analysis of the dynamics of economic systems. One of the main sources of change at the present time is the relationship between economic structures and the natural environment. After a period of interest in and debate on the subject of natural resource scarcity in the late 1960s and early 1970s (e.g. the controversy surrounding the Club of Rome report), public and professional interest shifted to different topical issues such as energy prices and the foreign debt of developing countries. Of course, work on optimal extraction of resources and optimal pricing policies for externalities both preceded and followed this period. In the 1980s economists became increasingly concerned about global environmental problems, realizing that they were strictly intertwined with the basic structural features of development. These concerns were popularized in the Brundtland Report and reflected in the renewed interest in economic models of the world economy (such as the LINK model and the World Input-Output Model). In this period there has been a flourishing of initiatives such as the establishment of new scientific journals and research institutes devoted to the interactions between the economy and the environment. This is a research area where new information, insights, and methods are required. The special theme of this issue includes a set of papers aiming to stimulate new research in this field. The theoretical and methodological themes treated in this journal may contribute to a better understanding of the environmental problems and to an improvement in current approaches to analysing and addressing them. For example, some of the topics discussed in the preceding special theme issue, such as the appropriate level of aggregation, and concepts of equilibrium and stability, are also encountered in examining resource extraction, the use of the environments assimilation capacity, and pollutant emissions resulting in acid rain and possible climate modification. The papers in this issue illustrate some of the efforts and misgivings characteristic of the work currently being carried out. Not all the approaches of interest are covered, but we intend to continue to publish articles in this area.

Structural financial instability and cyclical fluctuations

Abstract This paper introduces and discusses an heuristic model meant to clarify why and how economic instability may play a crucial role in a modern sophisticated monetary economy. In this model economic instability is specified in terms of structural instability rather than in the usual terms of dynamic instability. This different view of instability implies a different approach to the analysis of the dynamic behaviour of the economic system and of its structural changes. In particular, the qualitative changes in the economic behaviour of the economic system are seen not as purely exogenous as in the received view but as essentially endogenous. This approach is applied to the analysis of financial crises and of their impact on the fluctuations of a sophisticated monetary economy. The crucial variable, the degree of financial fragility of the economic units, is specified in terms of structural instability, and this implies that, beyond certain thresholds of its value, the qualitative characteristics of their dynamic behaviour change radically in such a way to produce cyclical, though fairly irregular, fluctuations. The interplay between these microeconomic fluctuations is sufficient to produce cyclical macroeconomic fluctuations whose characteristics and implications for policy are briefly examined.

Sustainable Development, Rationality and Time

The construction of a satisfactory model of sustainable development requires the assumption of a rationality criterion for explaining and forecasting the behaviour of economic agents, and for choosing the most adequate policy instruments. This paper aims to show that the traditional criterion of substantive rationality adopted by mainstream economics is inconsistent with a sound theory of sustainable development. This critical analysis will point out a few basic requisites for a more general rationality criterion fully consistent with a satisfactory model of sustainable development.

Greenhouse gas emissions and the energy system: Are current trends sustainable?

This paper discusses whether recent energy trends are compatible with the requirements of sustainable development. For this purpose, using decomposition analysis, we derive a few long-term sustainability conditions for the energy system and examine whether they are satisfied on the basis of the currently available data. It emerges that an Environmental Kuznets Curve in energy intensity and/or carbon intensity is insufficient to satisfy the sustainability conditions identified in the paper. Moreover, using simple graphical analysis, we show that the decomposition approach and the EKC imply two different relationships between per capita income and carbon intensity and discuss the relative implications.

Rationality, Learning and Complexity

Although standard economic theory is based on methodological individualism, this does not imply that individuals play a crucial role in economic models. On the contrary, in such a theory individuals are deprived of authentic subjective features and play no significant role as genuine subjects. The so-called homo economicus is characterized by given preferences that are conceived as exogenous and invariant over time. Therefore, the genuine psychological features of an economic agent do not matter.

Minsky Moments, Russell Chickens, and Gray Swans: The Methodological Puzzles of the Financial Instability Analysis

The recent revival of Hyman P. Minsky’s ideas among policymakers, economists, bankers, financial institutions, and the mass media, synchronized with the increasing gravity of the subprime financial crisis, demands a reappraisal of the meaning and scope of the “financial instability hypothesis�? (FIH). We argue that we need a broader approach than that conventionally pursued, in order to understand not only financial crises but also the periods of financial calm between them and the transition from stability to instability. In this paper we aim to contribute to this challenging task by restating the strictly financial part of the FIH on the basis of a generalization of Minsky’s taxonomy of economic units. In light of this restatement, we discuss a few methodological issues that have to be clarified in order to develop the FIH in the most promising direction.

Fluctuations and Growth: Keynes, Schumpeter, Marx and the Structural Instability of Capitalism

Keynes, Schumpeter and Marx contributed, perhaps more than anybody else, to the understanding of the inherent instability of a monetary economy and of the connected essential relation between cycles and growth. The analysis of economic cycles cannot be severed from the analysis of growth, because cycles and growth crucially interact in a structurally unstable economic structure, which is typical of any monetary economy and especially of developed capitalism. Each of our three authors reacted, though in different ways, to the traditional mainstream view according to which we may distinguish two sets of economic forces, respectively determining cycles and growth. The first set of forces should, in this view, explain disequilibrium cyclical movements around equilibrium trends whose dynamics is explained by the second set of forces. Disequilibrium dynamics is conceived as not affecting equilibrium trends so that we may study separately cycles and growth. The relation between the two sets of forces is then often rationalized through the distinction between short-period and long-period where short-period precisely excludes growth from the scope of analysis, while long-period excludes business cycles and all other disequilibrium movements. We will try to show that the relation between short-period and long-period as well as between cycle and growth has to be considered in a completely different perspective in the theory of our three authors. The structural instability of a monetary economy implies an unavoidable feed-back between short-period and long-period as well as between cycle and growth.

Inequality, Poverty and the Kuznets Curve

In this chapter we intend to analyze in some more detail the impact of globalization on within-country inequality. Income distribution became more unequal after liberalization in four large countries that account by themselves for much of the world population, namely China, India, Indonesia and Russia (Lindert and Williamson, 2003). Inequality increased mainly in globalizing countries with large regions cut off from the globalization process, such as rural and hinterland China or rural India. In some cases access to trade reforms and benefits was limited to an extremely small minority, as in Russia where only a few oligarchs took part in the internationalization process (Flemming and Micklewright, 2000). These observations suggest that the differential access to the process of globalization largely contributed to increasing inequality.