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A New Perspective on Ethics, Ecology, and Economics Donald L. Adolphson ABSTRACT. This paper introduces the important concept of a biophysical perspective on economics into the business ethics literature. The biophysical perspective recognizes that ecological processes determine what can be done in an economy and how best to do it. A bio- physical perspective places the economic system into a larger context of the ecologic system. This changes the perception of ethical issues by identifying a larger scope of management decisions. The paper examines the changing ethical landscape in such issues as biotechnology, planned obsolescence, productivity, and international trade. The paper also examines the shift in mindset associated with the shift in economic framework. It draws on the litera- ture on cognitive structures and moral imagination to show this new perspective can actually raise the bar for ethical decision-making and behavior. The pattern is that the ethical behavior associated with a biophysical eco- nomic framework has a greater scope of responsibility with the benefit that the required ethical behavior leads to better long-term decision making. KEY WORDS: Ecology, economics, natural capital, mental models, moral imagination Introduction This paper presents an alternate perspective on eco- nomics that highlights the interaction between the economic and ecologic systems and the ethical issues and provides a link between environmental and business ethics. Both fields are broad and large which provides some justification for keeping them sepa- rate. However, by keeping them separate, we miss important ethical issues that arise from the interaction between the environment and the economy. Werhane and Freeman list environmental sus- tainability as one of the four most important topics in contemporary business ethics (Werhane and Free- man, 1999). Freeman suggests that much of the past dialogue about business and ethics has taken place along the lines of what he calls the Separation the- ory. A succinct statement of the separation thesis is that a business decision has no moral content a moral decision has business content (Freeman, 1994). Freeman suggests this separation is self-serving for both business practitioners and ethics academics, but that it is ultimately a bankrupt discourse, failing to get to the heart of important issues in business ethics. This paper is a step in reintegrating ethics and business by integrating economics and ecology. This paper is stimulated by the development of a new framework for economic thinking, which can be described as a biophysical approach (Cleveland et al., 1984; Hall et al., 2001). This approach recognizes that ‘‘natural processes put limits on what we can do and how we do it’’ ( Jacobs, 2000, pp. 96 97). From this perspective, value is grounded in the biophysical realities of energy and matter including the basic laws of thermodynamics. In contrast, conventional thinking about economics emphasizes the exchange of goods according to subjective human preferences. The purpose of this paper is to examine the dif- ferent ways in which business ethical issues are Donald L. Adolphson is currently a full professor in the Romney Institute of Public Management at Brigham Young University. He has a B.A. in Mathematics from the University of Cali- fornia, Berkeley (1966) and a PhD in Computer Science and Applied Mathematics from the University of Wisconsin, Ma- dison (1973). His primary teaching responsibilities are teach Decision Analysis Courses to graduate students in MPA and MBA programs, at the University of Washington (1970- 1981) and at Brigham Young University (1981 Present). He has won numerous teaching awards and has published ex- tensively in Applied Mathematics and Operations Research Journals. He developed and taught a course in Creativity in Business and is currently teaching Business Ethics courses. Current research interests are in applied Excel-based decision analysis, the interface of economics and ecology, and building a learning framework to develop visionary managers and leaders. Journal of Business Ethics 54: 203 216, 2004. Ó 2004 Kluwer Academic Publishers. Printed in the Netherlands.

New Perspectives on Environment and Ecology

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Page 1: New Perspectives on Environment and Ecology

A New Perspective on Ethics,Ecology, and Economics Donald L. Adolphson

ABSTRACT. This paper introduces the importantconcept of a biophysical perspective on economics intothe business ethics literature. The biophysical perspectiverecognizes that ecological processes determine what canbe done in an economy and how best to do it. A bio-physical perspective places the economic system into alarger context of the ecologic system. This changes theperception of ethical issues by identifying a larger scope ofmanagement decisions. The paper examines the changingethical landscape in such issues as biotechnology, plannedobsolescence, productivity, and international trade. Thepaper also examines the shift in mindset associated withthe shift in economic framework. It draws on the litera-ture on cognitive structures and moral imagination toshow this new perspective can actually raise the bar forethical decision-making and behavior. The pattern is thatthe ethical behavior associated with a biophysical eco-nomic framework has a greater scope of responsibilitywith the benefit that the required ethical behavior leads tobetter long-term decision making.

KEY WORDS: Ecology, economics, natural capital,mental models, moral imagination


This paper presents an alternate perspective on eco-nomics that highlights the interaction between theeconomic and ecologic systems and the ethical issuesand provides a link between environmental andbusiness ethics. Both fields are broad and large whichprovides some justification for keeping them sepa-rate. However, by keeping them separate, we missimportant ethical issues that arise from the interactionbetween the environment and the economy.

Werhane and Freeman list environmental sus-tainability as one of the four most important topics incontemporary business ethics (Werhane and Free-man, 1999). Freeman suggests that much of the pastdialogue about business and ethics has taken placealong the lines of what he calls the Separation the-ory. A succinct statement of the separation thesis isthat a business decision has no moral content a moraldecision has business content (Freeman, 1994).Freeman suggests this separation is self-serving forboth business practitioners and ethics academics, butthat it is ultimately a bankrupt discourse, failing toget to the heart of important issues in business ethics.This paper is a step in reintegrating ethics andbusiness by integrating economics and ecology.

This paper is stimulated by the development of anew framework for economic thinking, which can bedescribed as a biophysical approach (Cleveland et al.,1984; Hall et al., 2001). This approach recognizes that‘‘natural processes put limits on what we can do andhow we do it’’ ( Jacobs, 2000, pp. 96!97). From thisperspective, value is grounded in the biophysicalrealities of energy and matter including the basic lawsof thermodynamics. In contrast, conventionalthinking about economics emphasizes the exchangeof goods according to subjective human preferences.

The purpose of this paper is to examine the dif-ferent ways in which business ethical issues are

Donald L. Adolphson is currently a full professor in the RomneyInstitute of Public Management at Brigham Young University.He has a B.A. in Mathematics from the University of Cali-fornia, Berkeley (1966) and a PhD in Computer Science andApplied Mathematics from the University of Wisconsin, Ma-dison (1973). His primary teaching responsibilities are teachDecision Analysis Courses to graduate students in MPA andMBA programs, at the University of Washington (1970-1981) and at Brigham Young University (1981 ! Present).He has won numerous teaching awards and has published ex-tensively in Applied Mathematics and Operations ResearchJournals. He developed and taught a course in Creativity inBusiness and is currently teaching Business Ethics courses.Current research interests are in applied Excel-based decisionanalysis, the interface of economics and ecology, and building alearning framework to develop visionary managers and leaders.

Journal of Business Ethics 54: 203!216, 2004.! 2004 Kluwer Academic Publishers. Printed in the Netherlands.

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framed when one shifts from the willingness-to-payperspective to a biophysical perspective. Section 2 ofthis paper will compare and contrast the biophysicalapproach to economics with the neoclassic approachto economics. Section 3 reviews important opti-mizing principles in business and in ecology thatguide strategic decisions. The section also describes ageneralized optimization principle that can serve as adecision-making guide for the interaction of eco-nomic and ecologic systems. Section 4 links thebiophysical approach to the literature on cognitivestructure such as mental models and to the literatureon moral imagination to show how the new frame-work can translate into improved ethical decision-making and subsequent behavior. Section 5 outlinesfuture work growing out of the work in this paper.

A biophysical perspective on economics

Embeddedness of economic systems

The foundation of a biophysical economics is that alleconomic activity originates in the material worldand is subject to basic laws of energy transformations,especially the first and second laws of thermody-namics. These two laws are identified by Ehrlichet al. (Daly and Twonsend, 1993) as the foundationof a set of principles ‘‘governing the bookkeeping bywhich one keeps track of energy as it moves through[various] transformations’’’.

From this perspective, energy replaces money asthe primary form of currency in measuring andtracking wealth. According to systems ecologistH.T. Odum, ‘‘Everything which we regard as beingof real value has to be produced and maintained bywork processes from the [physical] environment,sometimes helped by people and sometimes not’’.Odum’s statement recognizes that all work thatcontributes to human well-being involves transfor-mation of energy, whether or not humans are in-volved in the process. The work done for thebenefit of humans which does involve humans istherefore a proper subset of all work; in otherwords, work involving humans is embedded in thelarger system of all work done for the benefit ofhumans.

World Bank economist Herman Daly also arguesthat the economic system is embedded in an eco-

logic system. Daly’s argument is that the ecologicsystem is both the source and sink of all economicactivity and must be included in valuations of eco-nomic activity, if one is to avoid severe distortions.

Farmer and essayist, Wendell Berry articulates thesame perspective in his essay on the ‘‘Two Econo-mies’’ (Berry, 1987). Berry refers to industrialeconomy as the ‘‘Little Economy’’ to emphasize itsdependence on nature’s economy, which he calls the‘‘Great Economy’’. He characterizes the littleindustrial economy as one which is (1) not com-prehensive enough and (2) which tends to destroythat which it does not comprehend, and (3) dependson the things which it does not comprehend.

The biophysical approach to economics alsosupports the notion that an economic system isembedded in a social system. The biophysical ap-proach considers the complete scope of work donefor the economic well being of humans and recog-nizes that some of that work takes place in nature’seconomy, independent of human interaction.However, if we consider only the work done withhuman interaction, there are two distinct categories:that which takes place with the exchange of moneyand that which does involve an exchange of money.The human work without money takes place in thesocial systems and is based on familial and commu-nity relationships and norms. The human work donewith an exchange of money takes place in the eco-nomic system of producers and consumers based onmarket prices and voluntary exchange.

From a biophysical perspective, work done forhumans is the set of interest. The proper subset ofwork done for humans, but involving humaninteraction constitutes a proper subset of interest. Ofthe work done for humans, with interaction of hu-mans, a proper subset of this work occurs with theexchange of money.

Types of work

The difference between conventional thinkingabout economics and the less familiar biophysicalperspective can best be summarized by consideringthe types of work recognized by each framework. Abiophysical perspective on economics recognizesthat there are three types of work that contribute tohuman economic well being:

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A. Work performed by humans accompanied byan exchange of money.

B. Work performed by humans without a directexchange of money.

C. Work performed by nature independent ofhuman interaction.

Examples of the first type are abundant andobvious ! we see the first type of work wheneverwe buy a car, get a haircut, or buy stocks. Thesecond type of work is equally abundant, even if theeconomic benefit is not always recognized; examplesinclude a parent helping a child with homework, afamily planting a garden, a neighbour visiting thesick, or any type of volunteer work in a community.

The third type of work is also abundant but iseven more subtle since it takes place without anyhuman interaction and is a frequently unrecognized,unless these processes are interrupted. The mostbasic type of ecological service is photosynthesis !the transformation by green plants of solar energyinto chemical energy. Other types of ecologicalservice include silent soil building processes, nature’swater filtration through wetlands, or air filtrationthrough trees. All of these ecological services pro-vide economic benefit to humans, but without hu-man interaction.

Types of capital

According to Lovins et al. ‘‘The traditional defini-tion of capital is accumulated wealth in the form ofinvestments, factories, and equipment’’. (Lovins andHawken, 1999). This definition leads to the idea thatcapital can be thought of as the capacity for work !the more wealth you have accumulated, the morework you can get done. The traditional definition ofcapital has been expanded to each include non-financial forms of capital (Lovins and Hawken, 1999;Prugh, 1999). Thinking of capital as capacity forwork, we can associate each type of work with atype of capital:

A. Capacity for human work with money:Financial Capital.

B. Capacity for human work without money:Human Capital.

C. Capacity for nature’s work: Natural Capital.

We should note that our definition of humancapital is broader than that used in the economicsliterature (see Lucas, 1988). The typical economicsdefinition is restricted to individuals rather thencommunities or cultures, and focuses on educationand training. Even this limited view broadens one’sperspective of traditional forms of capital. Accordingto Lucas, ‘‘The idea of human capital seemed ethe-real when it was first introduced … but after twodecades of research applications of human capitaltheory we have learned to ‘‘see’’ it in a wide varietyof phenomena … for me the development of thetheory of human capital has very much altered theway I think about physical capital’’ (Lucas, 1988, p.35).

The term ‘‘social capital’’ is used in the sociologyliterature to refer to work accomplished throughsocial norms and institutions, that impacts theeconomy, but without direct economic incentives(Coleman, 1988). The paper by Coleman, notes theover-emphasis on the individual in the economicsliterature and the over emphasis on social norms inthe sociology literature. His paper is an attempt tointegrate the two perspectives into a single frame-work.

The work by Lucas and Coleman and others isimportant in expanding the scope of a framework forthinking about economics, but both leave out therole of nature’s processes that has an economic value,even without any interaction with humans. Severalauthors have recognized the need to include thistype of work to develop a realistic framework forthinking about economics and wealth. These authors

Figure 1. Two views on embeddedness of the economicsystem.

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include Odum (1996), Hall (1995), Daly (Daly andTownsend, 1993), and Georgescu-Roegen (in Dalyand Townsend, 1993).

Figure 1 shows the relationship among these typesof capital from conventional and biophysicalframeworks for economics. In the conventionalframework financial capital becomes the focus be-cause it is the most tangible ana readily measured. Itis dominated by the concept of financial capital,while human and natural capital are defined nar-rowly to fit within this framework. Human capital isvirtually equivalent to labor and natural capital isusually synonymous with natural resources in thisframework. From a biophysical perspective, naturalcapital is the foundation for all wealth, including allsources of energy as the primary focus. Humancapital in the form of labor and intelligence andcommunity and culture is added to the naturalcapital. Financial capital is important, but is ulti-mately built upon a solid foundation of natural andhuman capital. According to a valued colleague,‘‘natural and human capital form the invisible armthat drives the invisible hand’’ (S. Peck, personalcommunication).

Optimizing principles

The contrast between the two perspectives on eco-nomics can be highlighted by the operational prin-ciples to turn these perspectives into strategy andpolicy and action. Both perspectives have optimizingprinciples that translate concept into action.

Maximum profit principle

A guiding principle of neoclassic economics is tocreate and implement strategies that maximizeprofits. The principle was most forcibly stated byFriedman, who said that ‘‘there is one and only onesocial responsibility of business ! to use its resourcesand engage in activities designed to increase profitsso long as it stays within the rules of the game, whichis to say, engages in open and free competitionwithout deception or fraud’’ (Novak 2002, pp. 140-141) The moral justification for the principle istwofold. First it fulfills a commitment to investors

who are expecting the firm to do everything it canto maximize its return. Second, according to eco-nomic theory, if each individual firm acts in a waythat maximizes profits, the result is the best overallallocation of resources within the larger community.

Basic maximum power principle

Friedman has identified a principle that applies towork done within the formal economy. Decadesbefore Freidman stated the maximum profit princi-ple, the biologist, Alfred Lotka, formulated a guidingprinciple called the maximum power principle (Hall,1995, p. xiii), that applied to all natural systems butincluded only work done by nature, independent ofhuman interaction:

Natural systems adapt in a way that captures and usesall sources of energy as effectively as possible.

The evidence of the maximum power principle isubiquitous. The maximum power principle dictatesthe height and structure of a tree, the shape of a leaf,or the configuration of a bird. It is the principlewhich drives evolution and living systems that fail touse resources in conformance with the maximumpower principle, must either adapt or die. Similarly,a business that is not using its resources in a way tomaximize profits must either adapt or die.

To summarize, Freidman proposed a normativeoptimizing principle that applies only to work doneby humans for pay, while Lotka proposed a discriptiveoptimizing principle that applies to work done bynature for free. What is missing is a normative opti-mizing principle that applies to the interaction be-tween the economy and the environment.

Extended maximum power principle

The missing link has been supplied by systemsecologist, Odum, who spent a lifetime (1924!2002) studying the interaction of economic andecologic systems. Odum recognized the value of allthree types of work described in the previous sec-tion and sought to develop a guiding optimizingprinciple that applies to the combination of all typesof work.

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Odum recognized that money cannot serve as acommon denominator for all types of work sincenature performs work without the exchange ofmoney. Energy, however, can serve as a commondenominator since all work, whether done by hu-mans or nature, must be accompanied by anexpenditure, or more accurately, a transformation ofenergy (energy is never really expended, onlytransformed into useless energy, known as entropy).Since Lotka’s optimizing principle for living systemsis energy based, Odum’s approach was to extend themaximum power principle to include work done byhumans as well as work done by nature:

Those human!nature partnerships that capture anduse all sources of energy as effectively as possible willbe the ones that will be economically viable, in thelong run.

Human partnerships with nature

The extension of the maximum power principletakes into account an important distinction betweennature’s work and human work: choice. Nature, atleast from a human perspective, responds to invio-lable natural laws, while humans exercise agency andconscious choice. According to Odum, the beststrategy for organizing human economic systems isto ‘‘Let nature work for you … that’s the key.Wherever you are in the world, you find out whatthe natural cycle is and how you fit into it, devel-oping a partnership with nature’’. (Hall, 1995, p.99). Humans are free to organize our economicactivities in ways that are or are not consistent withthe maximum power principle. However, thosesystem designs that are more in alignment with theextended maximum power principle will be the onesthat will prevail in the long run.

In addition to identifying basic principles, Odumhas also designed an energy based accounting systemthat provides tools for optimizing the effect of hu-man and nature’s work (Odum, 1996). Thisaccounting methodology is grounded in the laws ofthermodynamics which provide the underlyingprinciples for keeping track of energy as it movesthrough various transformations.

Odum’s partnership ideas have been implementedfor several decades in his own state of Florida. One

such project deals with the massive amount sewagegenerated at Walt Disney World. That sewage isnow treated by ecological engineering ideas derivedby Odum to optimize the effectiveness of thepartnership between humans and nature. The hu-man/nature partnerships are in the form of wetlandrestoration to filter water for human use. The hu-man work in such projects is to increase to capacityof natural capital to do its work. The result is betterimproved habitat at lower costs to complete the task.Projects such as this eliminate ethical issues oftradeoffs between the economy and the ecology bycreating win!win solutions by simultaneouslystrengthening economic and ecologic systems(Brown, 1999).

Humans are free to choose wisely to partner withnature in mutually effective ways, but we are alsofree to ignore or even interfere or destroy the workof nature. However, humans are not free to choosethe consequences of our actions. The penalties forviolating natural laws are real and irrevocable andwe, as a culture will surely bear the consequences.Odum’s student and disciple, Charles Hall, points tomany failed civilizations and offers the observationthat ‘‘… any civilization that believes it can assignvalue independently of the laws of nature and thedictates of resources can do so only in the shortterm’’ (Hall, 1995, p. 205).

Odum’s ideas form the foundation of a biophys-ical perspective on economics that alters the ethicallandscape by including human work without pay(Type B) and work done by nature without humanintervention (Type C). The new ethical landscaperequires a greater sense of responsibility from marketparticipants, consumers as well as producers. Thereward for assuming the additional ethical responsi-bility is that choices made are more consistent withlong-term well-being.

Conflicts between maximum profits and maximum power

The biophysical perspective on economics highlightscertain features that are not emphasized in a neo-classic approach to economics. As a result, in certainsettings, ethical components of some managementdecisions that may be muted from a neoclassic per-spective are highlighted by a biophysical approach.We offer two short examples.

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Terminator technology: Destruction of natural capi-tal. ‘‘Terminator Technology’’ is the name given togenetically modified plants designed so that the seedsbecome sterile after the first year (Shiva, 2000, pp.82!86). This strategy is an ultimate form of plannedobsolescence, requiring customers to purchase seedsyear after year, rather than to save nature’s free seedsfrom 1 year to use the next. The potential negativeimpact on impoverished societies received muchattention, which forced developer Monsanto towithdraw the technology after intense protests byactivist groups. However, continued research in thistechnology has been approved by the USDA andmay still reach the marketplace (Shiva, 2000, p. 84).

The terminator technology is an extreme exampleof the misuse of natural capital: beyond blindness tothe benefits provided by natural capital, beyondwaste of natural capital, the terminator technologydeliberately creates shortages to increase demand andprice by interfering with nature’s processes thatothers are depending on for sustenance and survival.

Much of the traditional business press, operatingfrom the paradigm of conventional economics, hasfocused on legal issues surrounding patent rights, buta biophysical perspective highlights the cost borneby those whose base of livelihood is being destroyedfor the purpose of private gain for the corporationsowning the technology and the stakeholders of thesecorporations.

Single use cameras: strategic waste of natural capi-tal. Large photography firms such as Fuji and Kodakhave created a product line of convenient, dispos-able, or single-use, cameras. The single use is more amarketing strategy than a technological issue. In fact,several companies have refurbished so-called single-use cameras, and have resold them at prices con-siderably lower then those of first use disposablecameras. John Benun, founder of JazzPhoto Cor-poration, boasts that he can squeeze as many as eightuses out of a single-use cameras (Bandler, 2002). Thebig companies such as Fuji and Kodak have suc-ceeded in driving most of the recyclers out ofbusiness through violation of copyright laws, butJazzPhoto remains a thorn in the side of the largercompanies. Fuji argues, ‘‘single-use cameras werenever intended to be fixed’’ (Bandler, 2002).

A biophysical perspective highlights that strategiesthat create short-term value by artificially limiting

effective use of natural resources inevitably result inthe waste of natural capital. It also highlights the factthat, as a species, we live on a finite energy budgetand that natural capital that is purposefully wastednow will not be available to provide sustenance forcurrent and future generations. Purposeful waste ofpublic natural resources does the same harm aspurposeful destruction to future beneficiaries orthese resources.

Writing from a thermo-dynamics biophysicalperspective, Georgescu-Roegen states:

Every time we produce a Cadillac, we irrevocablydestroy an amount of low entropy [or, availableenergy] that could otherwise be used for producing aplow of a spade … Economic development throughindustrial abundance may be a blessing for us now …but it is definitely against the interest of the humanspecies as a whole, if its interest is to have a lifespan asis compatible with its dowry of low entropy [or,available energy] (Daly and Townsend, 1993, p. 85).

Changing behavior

Cognitive structures

We argue in this section that augmenting the con-ventional view of economic behavior with a bio-physical approach will lead to better ethical practice.We base our argument on the literature that linksmental models and other cognitive structures toethical behavior and show how new mental models,consistent with a biophysical approach to econom-ics, help decision makers to more fully understandthe impact of their decisions, before decisions aremade.

First we must establish the context for this argu-ment. The essential context is that we do notexperience reality directly and objectively, but onlythrough our own conceptual schemes and mentalrepresentations of our experiences. These ideas arebased on the work on sensemaking by Weick (1995)and others and the work on mental models by Senge(1991) and others.

Sensemaking can be defined as ‘‘placing stimuliinto frameworks … that make sense of stimuli’’(Starbuck and Milliken, 1988, p. 51). Mental modelsare the mental representations that we carry around

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in our minds of our experiences. Thus, the responseto a given stimulus is determined not just from thenature of the stimulus but by the way that thestimulus interacts with our mental models. Thisrelationship is shown in Figure 2 and accounts fordifferences in responses from those receiving thesame stimulus.

Two short examples illustrate this point. A shortpiece appeared on the front page in the Wall StreetJournal on January 31, 1995 (WSJ, 1995), under theheadline ‘‘Drug Companies Suffer a Case of theSniffles’’. The piece notes the bad news that reve-nues were lower than expected for drug companiesbecause of a light flu season. The piece concludedwith the hopeful observation that there were still6 weeks in the flu season and that it might still be agood flu season. The unstated question was whetheror not it is good for more people to catch the flu sothat drug sales will be higher.

A similar example occurred in December 2003 asthe first case of mad cow disease in the United Stateswas announced (Sappenfield, 2003). Response bythe media and public statements has been mixed.The most frequently expressed concern is about thefinancial risk to the beef industry rather than to thepublic health risk to the nation. Because of this fo-cus, discussions of responses to the problem are morefocused on what to do to maintain consumer con-fidence in the beef industry than on what to do toinsure a safe supply of beef.

In both cases, one concern is for the financial wellbeing of the relevant industry, while the otherconcern is for public health and safety. While mentalmodels are not subject to direct observation, one caninfer something about a mental model by observingthe stimuli and corresponding responses. In this case,the revenue concerns expressed for the drug andcattle industry are consistent with the neoclassicembeddedness relationship of the social and ecologicsystems being subsystems of the economic system.On the other hand, the public health responses in

both cases are consistent with the biophysical em-beddedness relationship of the economic systembeing subsystem of both the social and ecologicalsystems.

Gioia (1992) offers further insights into the effectthat cognitive structures have on ethical behavior,coming from the unique perspective of one who wasinvolved in a highly publicized ethical dilemma, therecall of the Ford Pinto in the 1970s, and also hashad the opportunity to pursue an academic careerthat has provided time to reflect on the dilemma. AsGioia teaches the Pinto case that he has written, hecringes as some students offer the simple explanationthat he was guilty of moral failure. This is clearly oneviable explanation for any ethical misdeed, but itdoes not offer much help for those looking to helppeople having strong grounding to avoid actingcounter to those beliefs.

Gioia offers an alternate explanation based on thepower of invisible cognitive structures to influencedecision-making. From the opportunity to reflect onhis experience on the front line of recall decision-making, Gioia now understands the power of pre-vailing, but invisible, cognitive structures to influencebehavior. Gioia defines a schema as a cognitiveframework that people use to impose structure uponinformation, situations, and expectations to facilitateunderstanding. This is essentially equivalent to amental model. He identifies a script as a special type ofschema that retains knowledge of actions appropriatefor specific situations and contexts. Gioia emphasizedthat scripts not only provide a cognitive frameworkfor understanding information, but also serve as aguide to behavior in particular situations and con-texts.

Gioia’s central thesis to explain his behavior as therecall director was that his own scnematizedknowledge unconsciously influenced him to per-ceive recall issues in terms of the prevailing decisionenvironment. When the issues are perceived in theseterms, features that do not fit the existing script can

Figure 2. Relationship between sensemaking and mental models.

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easily get overlooked. Although the outcomes of thecase carried ethical overtones that were obvious inretrospect, the schemas driving his perceptions andactions precluded considerations of the issues inethical terms because the scripts did not includeethical dimensions.

Gioia identifies the most damaging part of theprevailing script that hampered his ability to see themoral dimension of the recall decision process wasthe part that said in effect: ‘‘No emotions allowed inthe decision-making arena’’. This part of the scriptmuted Gioia’s attempts to argue for recall fromphotos of burned up Pinto cars.

Gioia acknowledges the necessity of organizingdecision information into schemas, for without theschema, the sheer volume of incoming informationwould overwhelm the decision maker. Given thenecessity of cognitive schema to organize informa-tion, the challenge then is to develop within man-ager’s an ability to recognize the mental models thatare operating in their decision making processes, andto evaluate and alter or even replace existing mentalmodels to fit the particulars of the current decision.

Systemic mental models

Within this context, we can now make the case thata biophysical perspective will lead to better ethicalbehavior. The work of management consultant Pe-ter Singe is relevant to our discussion here. Senge hasrecognized the need for modern organizations totake a more systemic approach to managementdecision-making. He has identified five key attri-butes that managers must develop in they are to besuccessful in the dynamic and complex businessenvironment that exists today. One of these keyattributes is the ability to recognize the mentalmodels that they are operating in and, when nec-essary to create new mental models that will allowthem to be more effective managers. Through muchexperience in training managers to recognize themental models that are operative in their decision-making, he notes that:

The impact on managers’ understanding is profound !most report that they see for the first time in their lifethat all we ever have are assumptions never ‘truths’ that

we always see the world through our mental modelsand that mental models are always incomplete, andespecially in Western culture, chronically nonsystemic(Senge, 1990, p. 185).

Assumptions easily get mistaken for truth whenthe assumptions operate below the level of awareness.For example, if one knows a single language, ques-tions about that language are likely to surface, butquestions about language itself are not so likely tosurface. If the language is English, one may note thatthe language contains nouns and adjectives and thatadjectives precede nouns. One may assume that allhuman languages contain nouns and adjectives andthat adjectives always precede the noun they modify.This assumption may be below the level of awarenessin which case questions about the sequencing ofnouns and adjective would never surface. But, whenone is introduced to a new language such as Spanish,it becomes apparent that nouns and adjectives stillexist but the sequencing is altered. It is at this pointthat the person becomes aware of their assumptionthat adjectives always precede nouns. This is the kindof experience that Senge’s managers experience,when for the first time in their lives they begin torecognize how many of their decisions are made onautomatic pilot without any real visions of otheropportunities.

Another critical insight gained by Senge managersis that their decision-making frameworks arechronically non-systemic. This means that theirframeworks focus on strict causal relationships amongthe parts of a system. The appeal of such models isthat they are neat and clean and easy to understand.The drawback is that they fail to represent much ofwhat is happening in the real system. The modelassumes simple causal relationships, but in reality wehave intricate webs of interacting variables. Themodel assumes and independent system, but in realitywe have nesting set of subsystems at multiple levels,with interaction between the subsystems.

A biophysical perspective on economics is in areal sense a second language for describing economicactivity. It is an energy-based language rather than amoney-based language. Furthermore it is systemicbecause it recognizes that economics can best beunderstand by considering the systems of which it isa subsystem and because it recognizes that economicactivity involves a web of interacting forces. Being a

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distinct second language from the conventionalneoclassic approach, important questions surface inthis context that would not otherwise arise.

Mad cow disease provides a vivid example of thecontrast between systemic and non-systemic decisionframeworks. The disease is caused by feeding practicesthat were instituted as a cost cutting measure (Sap-penfield, 2003). From a non-systemic perspective, thecost cutting looks good because it appears that it willincrease margins and profits and allow the industryand firms in it to prosper. From a systemic approach,the health risks to the cattle and to the potentialcustomers of the beef industry are considered as a keypart of the model. If the cattle all die, or if enoughcustomers stop eating beef to avoid serious illness,then the short-term gains from cost cutting feedingpractices mean little. A systemic approach to decisionmaking on feeding practices may have avoided thewhole disaster with the British beef market, with bothproducers and consumers better off.

Senge’s process of raising awareness of mentalmodels and their characteristics is designed to pro-mote more effective decision-making, but there isno explicit moral component in his awareness raisingprocess. Systems thinking and systemic decisionmodels may improve ethical behavior, but there isno causal link between increasing awareness ofmental models improved ethical behavior. Forexample, if one augmented an existing amoralmental model with another amoral model, ethicalbehavior would not necessarily improve. However,if one augments an existing amoral mental modelwith one that has a clear moral dimension, thenethical behavior is likely to improve.

Moral imagination

Werhane recognizes that systems thinking alone willnot improve ethical behavior, therefore she argues thatsystemic models must be augmented with moralimagination to create a methodology that injects amoral dimension into ordinary business decision-making (Werhane, 2002). She defines moral imagi-nation as the ability to ‘‘perceive that a web ofcompeting economic relationships is, at the same time,a web of moral relationships’’ (Werhane, 1999, p. 5).

Werhane also notes that the moral aspect of moralimagination includes ‘‘searching out places where

people are likely to be hurt by decision-making orbehavior of managers’’ (Werhane, 1999, p. 5). It isthis moral aspect or proactively searching for thosewho would be harmed by our decisions that linksmoral imagination to a biophysical perspective ofeconomics. Essayist Berry (1987) also notes this linkwhen he describes how seeing the smaller industrialeconomy in the context of the larger economy ofnature, helps us to see that industrial wastes andlosses are not just ‘‘trade-offs’’ or ‘‘necessary risks’’but they are ‘‘costs that, like all costs, are chargeableto somebody sometime’’ (Berry, 1987, p. 71). Bio-physical economic analysis does precisely what Berryspeaks about: it identifies what the real costs are andwho will bear those costs. A mental model thathighlights such features of a problem cannot guar-antee better ethical decision making, but it at leastprovides that type of information that a moraldecision maker would want to have.

To summarize the argument to this point, Sengeshows that asmanager’s becomemore aware ofmentalmodels and their properties, they become more sys-temic in their thinking, which prepares them better tosee moral dimensions in economic decisions. Gainingan awareness ofmentalmodels is like preparing the soilfor good ethical behavior, but in order for the soil tobear fruit in terms of improved ethical behavior, anethical seed must be planted. Werhane identifies thedevelopment of moral imagination as the moral seedto be planted in the soil prepared by a systemic view ofthe situation. She identifies one important attribute ofmoral imagination as the ability and the will to searchout the places where people are likely to be hurt bymanagerial decision making. Berry shows that rec-ognizing that the formal economy is embedded innature’s economy, makes clear consequences of ourdecisions are not just side effects, or what economistseuphemistically call external costs, but they are realcosts borne by someone, somewhere. Finally, a bio-physical perspective on economics with accompany-ing energy accounting tools provide the tools forcarrying out the search out and identify those whobear the externalized costs of management decisions.

Summarizing in the opposite direction, biophysicaleconomics provides tools to search for the bearers ofexternalized costs, which makes these costs more realin the mind of decision makers. The ability to identifysuch costs is an important element in developingmoral imagination, which is a necessary step in the

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integration of moral elements into the managementdecision process. The integration of moral elementsrequires the development of new mental models andassociated behavioral scripts. The changing of thescripts associated with new mental models is thebottom line connecting a biophysical approach toeconomics with improved ethical decision making.

Foresight and ethics

The previous examples show that a biophysical per-spective on economics requires a broader sense ofresponsibility than that required from the conven-tional economics framework. Robert Greenleaf,founder of the Servant Leadership Institute and life-time observer of management and ethics, sets astandard consistent with the bio-physical perspective:

The failure (or refusal) of a leader to foresee may beviewed as an ethical failure, because a serious ethicalcompromise today (when the usual judgment onethical adequacy is made) is sometimes the result of afailure to make the effort at an earlier date to foreseetoday’s events and take right actions when there wasfreedom for initiative to act. The action which societylabels ‘unethical’ in the present moment is often reallyone of no choice. By this standard, a lot of guiltypeople are walking around with an air of innocencethat they would not have if society were able to pinthe label ‘unethical’ on the failure to foresee and theconsequent failure to act constructively when therewas free to act. (Greenleaf, 1998, p. 130).

Greenleaf ’s observations about foresight showthat foresight is a form of moral imagination - seeingthe unseen moral dimensions of decisions made nowso that we do not get caught in a lose!lose situationlater. It raises the ethical accountability from what isknown to what is knowable. This is a standardcompatible with a biophysical standard.

The implications of not following the higherethical standard set by the biophysical perspectivecan be illustrated by the case of the cod fishingindustry along the Atlantic shores of Canada. TheGrand Banks area of the North Atlantic off New-foundland has provided food and employment forlocal communities for over three centuries. The codseemed inexhaustible until the late 1960s, when thequantity and average fish size began to decline.Fishery scientists, ecologists, and even some of

smaller fishermen recommended a strategy that in-cluded a period of reduced fishing to allow thereplenishment of the fish populations and to healdamage done to habitat. Unfortunately, market sig-nals were distorted by government subsidies and thefish harvests kept increasing until the whole industrycompletely collapsed in 1992. The result was disas-trous in terms of financial, human, and naturalcapital ( Jacobs, 2000, pp. 96!97).

This example is subtler than the previous exam-ples. There was no intent to destroy or require wasteof natural capital. The strategies pursued by pro-ducers and consumers were consistent with marketsignals that failed to reflect the pending disaster.Government official were acting in according withwell established policies for supporting a localindustry. However, the pending disaster was fore-seeable, even if not foreseen. The costs of fishingwere badly distorted by government subsidies,which in turn kept market prices artificially low,which led to demand exceeding the supply of fish.

The question then is whether or not the marketparticipants, consumers as well as producers, wereacting in an ethical manner. From a conventionaleconomics framework, consumers and producerswere merely acting in their self-interest according tothe market signals easily available to them. If theprices were distorted by the government subsidies,then one could argue that the fiasco was the gov-ernment’s fault, not the market participants’. Thisrationale has some credibility since the governmentclearly bears at least a portion of the accountability.

Since our primary intent here is on businessdecision-making, we will focus our attention on theproducers in the cod fishing industry, but this in noway is meant to absolve either the government orthe consumers from their accountability in thedisaster. Producers were operating within a freemarket mental model. A part of this mental modelthe maximum profit principle which is that the onlysocial responsibility of a business is to maximizeprofits, provided that it play by the rules of the game,which involves open and free competition withoutdeception or fraud. Once government subsidies arein place, they become, in this mental model, parts ofthe rules of the game. Given these rules, the profitmaximizing strategies for many of the larger fishingcompanies was to invest in new equipment to allowthem to capture more fish more quickly.

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In generalizing from his experience as a Fordrecall coordinator, Dennis Gioia, notes that scripteddecision-making is necessary to deal with theamount of information in most organizations. Heobserves that scripted decision-making is efficientfrom the perspective of time needed to make adecision, but there is no guarantee that the quickestdecision is the best decision (Gioia, 1992, p. 386).Scripted decision-making tends to perceive thosefeatures of a particular problem that fit the script, buttends to dismiss anomalous information. He con-cludes, ‘‘Scripts offer a viable explanation for whyexperienced decision makers (perhaps, especiallyexperienced decision-makers) tend to overlook whatothers would construe as obvious factors in making adecision’’. (Gioia, 1992, p. 386).

Returning to the cod-fishing example, it wouldbe obvious to most that catching more fish is not aproper response to ecologic signals that both thequantity and size of fish caught were declining. Thisinformation was available to corporate decision-makers, but was not a part of management decision-making models and associated scripts of the codfishing industry. What was part of the corporatedecision-making models and associated scripts is thatmoving to larger scale would spread fixed costs overmore units, this reducing average cost per unit.Signals consistent with this script were perceived andacted upon, while signals that did not fit this scriptwere not perceived and therefore not acted upon.

Giving the benefit of the doubt to the corporatedecision makers involved in the decision to fishfaster in the face of declining catch, we assume thatthe decision making scripts blinded the decisionmakers from seeing the full consequences of theirdecisions. The blindness would either be in the formof not noting who might be hurt or of being blindedto short run tangible benefits to optimistically esti-mate negligible probabilities of industry collapse. Ineither case, the decision did not qualify as moralimagination in the sense referred to by Werhanebecause they did not include a willingness to searchout those places where people would be hurt bytheir decisions, or if they did, they included a will-ingness to ignore the harm done to others.

The most damaging part of the prevailing script inissues at the interface of economics and ecology isnot the existence of the neoclassic approach, butrather the part of the script that indicates that nothing

but a neoclassic approach is needed to make wise andmoral management decisions. The neoclassic ap-proach clearly adds value and insight to economicdecision-making, but when one accepts the notionthat nothing but this approach is needed to bringethical issues to the surface, then important ethicaldimensions are missed. The added value of a bio-physical perspective on economics is that it puts theeconomic activities into a larger context, whichbrings ethical issues to the forefront that would notbe highlighted without the biophysical perspective.

The issue looks different from a biophysical per-spective and the compatible ethical standard set byGreenleaf. The ecological analysis of the cod fishingindustry reflected the biophysical realities that thesupply of fish could not keep up with demand andrecommended reduced fishing for a period to allowthe fish supply to regenerate. This information wasknowable, even if unknown. However, the highlyrelevant ecological information never filtered downinto the minds of consumers, and therefore, themarket signals sent by consumers indicated a contin-ued high demand. And with incomplete and inac-curate information, the values reflected by consumersin this market failed to incorporate the biophysicalrealities. The market was able in the short run to ig-nore the biophysical realties, but not in the long run.

This example reinforces an important lesson.Behavior deemed ethical by a biophysical perspec-tive leads to long-term well-being. In contrast, if oneacts ethically from an economic perspective whilebeing blind to biophysical realities, the actions canlead to sudden and unpleasant consequences forindividuals and even whole communities.

International trade

A key tenet of conventional economic theory is a faithin unfettered international trade as a key to prosperity.The moral justification for trade is that trade ismutually beneficial, giving the more developed na-tion access to less expensive labor while raising thestandard of living in the less developed nation. Thisrationale is used to justify policies that may harm thedeveloping nation in the short run, with a promise ofhigher standards of living in the short run.

The logic of trade, from a conventional eco-nomics perspective, is that if voluntary trade takes

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place, it must be mutually beneficial. However thelogic only holds if both parties understand the valueof what they are trading. Biophysical analyses revealthat conventional economics underestimates thevalue of all products and services being traded sinceit fails to account for the free work of nature that isinvested in a good or service.

Biophysical analyses of international trade (Hall,1995; Odum, 1996) reveal a built-in bias against theless developed trading partner. This is true becausethe less developed partner is usually more dependenton nature and therefore, has a greater proportion ofnature’s free work invested in their products. If thevalue of nature’s free work is ignored, the tradeappears to be fair, but when it is included, the lessdeveloped nation is trading more value than is re-ceived. With this bias in place, a trade that appears tobe mutually beneficial will often be unfair to the lessdeveloped nation.

We will expand on the general principle above byconsidering a retrospective biophysical analysis ofEcuador’s Shrimp Mariculture industry undertakenby Odum at the request of Stephen Olsen, a resourcemanager at the Coastal Resources Center at theUniversity of Rhode Island (Hall, 1995, pp.207!215). Olsen recognized that one could notmodel a system of interest (Ecuadorian ShrimpMariculture) without modeling the system thatcontains it (Ecuador).

The analysis of Ecuador revealed that Ecuador isrich in natural resources with a high potential forgenerating wealth for human societies. Populationdensity is relatively low and population growth ishigh. Oil was discovered in the 1970s fueling rapidgrowth of export income. The GNP was $1.1B in1965 and grew at an annual rate of about 11% to$11.5B in 1985. From the perspective of traditionaleconomics, this is a respectable growth rate andshould be reflected in a higher quality of life for thecitizens of Ecuador.

However, rising GNP and rising quality of life donot always go together. It is possible for a set ofpolicies and practices to appear to be generatingprosperity, as measured by an increase in financialcapital in the formal economy but result in largerlosses of human and natural capital. Odum’s bio-physical analysis of Ecuador shows that this is pre-cisely what has happened with the development ofthe Shrimp Mariculture Industry along the coasts

of Ecuador. According to Olsen, the cost of basicnecessities for the poor has escalated; residents ofGuayaquil no longer have access to inexpensive,shrimp, mangrove oysters, or crabs. Fish that werelarge and abundant 20 years earlier are now smalland scarce. Mangrove poles used to build houses arealso scarce now where they were abundant.

A biophysical framework for economics highlightsthe important truth that wealth always comes in theform of energy; even money does not representwealth unless it can be exchanged for real wealth inthe form of energy. Therefore, to be able to meetones needs and to generate a surplus to move beyondsubsistence one must have access to energy in theform of food, air, water, fertile soil, shelter, etc. Forthe poor, much of this accessible energy is outside theformal economy. What this means is that manage-ment decisions made on the basis of conventionaleconomics which only measure the amount of eco-nomic activity in the formal economy, may wellincrease the activity in the formal economy, but witha greater decrease in the economic activity takingplace in the informal human economy and in nature’seconomy. This is precisely what was happening, atleast on a local level, with the development of theShrimp Mariculture Industry.

The ethical questions surrounding internationaltrade would change radically in circumstances wherethe practice of free trade is shown to be harmful tothe less developed nation. In these cases, what lookslike fair trade to the benefit of both really is ex-ploitation of the weaker nation. In such cases, eitherthe trade arrangements need to be altered or themoral justification needs to be re-examined.

It is beyond the scope of this paper to sort outthese complex economic and ethical issues sur-rounding international trade. The purpose of thisexample is merely to show how the ethical landscapelooks much different from a biophysical perspectivethan from a neoclassic economics perspective and tostimulate dialogue about the fairness of the exchangein international trade.


This paper has introduced the concept of biophysicaleconomics as a new way of thinking about issues at

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the interface of economics and ecology and hasshown how this perspective alters the ethical land-scape. It does this by showing that the scope ofmanagement decision is broader than may have beenexpected and that harm done to specific people canbe traced more effectively than before. This leads toa broader sense of responsibility to match thebroader scope of business decision-making.

In many ways, this paper has just touched the tipof the iceberg in terms of re-examining the ethicalissues that arise at the interface of economics andecology. The final example that touches on newinsights into the fairness of international tradehas extremely important consequences and futureresearch should address these issues in greater detailthan was given here.

There is much more to be studied about how theway we frame economic activity affects the way thatwe think about ethical issues in business. For exam-ple, Nelson and Winter have given a thoughtfulcritique of the neoclassic framework and have pro-posed and alternate evolutionary theory of economicchange (Nelson and Winter, 1982). The evolution-ary theory may complement nicely the biophysicalapproach. The whole area of socially responsibleinvesting has not even been touched on in this paper,but insights from a biophysical perspective may offerimportant insights and guide to practice in this arena.

In conclusion, a biophysical perspective on eco-nomics broadens the scope of business decision-making and the ethical issues associated with suchdecisions. It defines a fruitful area for further researchto examine business ethics issues that occur more andmore frequently at the interface between economicsand ecology.


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