Economists versus engineers: Two approaches to environmental problems

There are two distinct and partly irreconcilable approaches to analyzing environmental problems. The first, we call the engineering approach and the other the economic approach. The engineering view brings focus to the technical limitations we face in given production processes operating under given parameters. The economic approach brings attention on the crucial role of economic –and not simply technical– substitution and to the conditions under which humans successfully coordinate their plans. Environmentalists generally give weight to the engineering approach according to which substitution is too limited to enable durable economic growth. This hypothesis has empirical content. The available empirical evidence, however, vindicates the economic approach. At least in the case of raw materials, the expenditure shares used to pay for them have steadily declined since at least a century, suggesting that substitution is a powerful force and that their declining physical stock are getting less, not more, important for long run economic growth. Finally, we explain how the economic approach is unique in its emphasis on adaptation and the institutions under which adaptation is facilitated.