Edited by Jeroen C.J.M. van den Bergh
Chapter 59: Physical Principles and Environmental Economic Analysis
Matthias Ruth 1. Introduction Advancements in the physical sciences have significantly influenced the history of economic thought (Mirowski, 1989). The fathers of the marginalist revolution have been intrigued by the predictive capacity of physics, and have imitated physics through the development of analogies between economic and physical concepts and processes. Examples include the identification of pleasure, or utility, with energy (Edgeworth, 1881; Fisher, 1892), and comparisons of the equality of the ratios of marginal utility of two goods and their inverted trading ratio to the law of the lever (Jevons, 1970). Following these analogies, certain aspects of production, consumption and exchange were translated into functional forms that had previously been analysed in the physical and engineering sciences (Proops, 1985). With the general acceptance of physical concepts in economic theory came an application of mathematical tools developed in classical mechanics for the analysis of economic processes. More recently, physical principles have been revisited in an attempt to better understand the nature of economic production and consumption processes and to link these processes to changes in environmental quality (Georgescu-Roegen, 1971; Ayres, 1978; Daly and Umafia, 1981; Faber et al., 1987). These attempts have been spurred both by developments in the physical sciences and the growing dissatisfaction among economists with the treatment of natural resources and the environment in economic models (Boulding, 1981). The physical concepts on which much of recent analyses draw include the laws of conservation of mass and of energy, and the second law of thermodynamics. Each of those laws...
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