The Historical Evolution of Economic Thought and Its Ecological Connections

How did economists – from Adam Smith in the 18th century to ecological thinkers in the 20th – gradually come to reckon with nature’s limits? The relationship between economics and ecology has a long, intertwined history that most people never hear about. Classical economists didn’t ignore the natural world. In fact, many of their ideas laid the groundwork for what we now call ecological economics. Understanding this evolution helps us see why today’s sustainability debates aren’t new – they’ve been simmering for over two centuries.

Classical economics and the birth of modern economic thought 🔗

Classical economics emerged in the second half of the 18th century, driven by thinkers who wanted to understand how nations create wealth. Adam Smith, widely regarded as the father of economics, published The Wealth of Nations in 1776 during the Scottish Enlightenment. His central insight was the division of labour – the idea that breaking production into specialised tasks dramatically increases productivity. A pin factory, in his famous example, could produce thousands more pins when each worker focused on a single step rather than making entire pins alone.

Smith also introduced the concept of the invisible hand, arguing that individuals pursuing their own self-interest inadvertently promote the broader economic good. Competition, he believed, acted as a natural regulator – preventing any single actor from exploiting the market. This led him to advocate for laissez-faire principles, with minimal government interference in markets. These ideas became the bedrock of free-market capitalism and continue to shape economic policy worldwide.

Smith’s overlooked ecological dimension 🔗

What most people don’t realise is that Smith’s thinking had a deeper ecological dimension. Classical economists like Adam Smith treated land – or natural capital – as integral to their economic frameworks. Recent scholarship argues that Smith should be considered a thinker within the tradition of ecological economics, as he grounded his political economy in an account of evolving human-environment relationships and understood the economy as a subset of the environment. He also showed awareness of biophysical limits and concern for sustainable resource use – themes that wouldn’t become mainstream for another two centuries.

However, Smith’s economic model is built on the premise of ever-expanding growth, and the real-world system in which it operates has finite resources and limited capacity to absorb waste. This tension between growth and ecological limits remains one of the defining challenges of our time.

Ricardo, Marx, and theories of value 🔗

David Ricardo, another towering figure in classical economics, developed the theory of comparative advantage. This principle demonstrated that even if one country could produce everything more efficiently than another, both nations would still benefit from trade by specialising in what they produce at the lowest relative cost. It remains one of the most influential ideas in international trade theory.

Karl Marx offered the most powerful critique of classical capitalism. He believed that profits in a capitalist system could only come through the exploitation of workers – by paying them less than the value they created through their labour. Marx broke down labour value into direct labour (the work physically done) and indirect labour (embedded in tools, machines, and raw materials). His concept of surplus value – the gap between what workers produce and what they’re paid – became central to his critique of capitalism.

Both Ricardo and Marx contributed to theories of value, though they differed sharply. Ricardo focused on the labour embodied in goods as a measure of value, while Marx introduced abstract labour as a unifying concept – a way of comparing different types of work on a common basis. These frameworks raised fundamental questions about who benefits from economic activity and at what cost, questions that ecological economists would later extend to nature itself.

Malthus, Mill, and early environmental concerns 🔗

Thomas Malthus and the population problem 🔗

Thomas Malthus sounded one of the earliest alarm bells about ecological limits in economics. His famous Population Doctrine, published in 1798 in An Essay on the Principle of Population, warned that human population grows geometrically (exponentially), while food supply grows only arithmetically (linearly). The inevitable result, he argued, would be famine, disease, and social collapse as population outstripped the Earth’s ability to feed everyone.

Malthus turned out to be wrong in the short term – technological advances in agriculture and industry pushed the crisis further into the future than he predicted. But his core insight – that there are physical limits to growth on a finite planet – remains deeply relevant. Modern debates about food security, overpopulation, and resource depletion owe a direct debt to Malthus.

John Stuart Mill and the steady-state economy 🔗

John Stuart Mill took ecological thinking in economics a step further. He advocated for more equitable income distribution and emphasised the connection between individual behaviour and the common good. But his most radical contribution was perhaps his argument against converting all natural capital into man-made capital.

Mill envisioned a future where mature economies would stop growing and reach a steady state – a condition where economic activity remains stable rather than constantly expanding. He saw this not as failure but as a positive outcome, a sign of civilisation reaching maturity. This makes Mill arguably the first economist to articulate something resembling modern steady-state economics, a concept now central to ecological economics and degrowth thinking.

Jevons and the birth of energy economics 🔗

W. Stanley Jevons is best known today for his contributions to the marginal theory of value, which helped launch the marginalist revolution in economics. But his most ecologically significant work was The Coal Question, published in 1865.

Jevons raised the question of sustainability by asking whether Britain was wise in allowing its economy to grow beyond a level it could maintain over the long term, given its dependence on finite coal reserves. He was the first economist to recognise the critical importance of energy – specifically coal – as the foundation of economic growth. With The Coal Question, Jevons laid what many scholars consider the first foundations of environmental economics.

Jevons also discovered what is now called the Jevons Paradox: he argued that increased efficiency in energy consumption would not reduce demand but would actually spur greater use, further depleting supplies. This paradox remains directly relevant today – improvements in fuel efficiency for cars, for instance, often lead people to drive more rather than less.

Unlike Malthus, who assumed resource growth was linear, Jevons treated resource consumption as growing exponentially, just like population. This made his predictions about depletion even more alarming. While Jevons was ultimately wrong in underestimating the potential of coal substitutes like petroleum and hydroelectric power , his framework for thinking about energy, growth, and resource limits was groundbreaking.

Julian Simon and the optimist’s rebuttal 🔗

Not everyone agreed that resource scarcity was a problem. Julian Simon, an American economist, mounted the most famous challenge to Malthusian and environmental pessimism. In his influential book The Ultimate Resource (1981), Simon focused on the lasting economic benefits of continuous population growth, arguing that human ingenuity could create substitutes and drive technological progress even despite limited physical resources.

Simon is perhaps best remembered for the Simon-Ehrlich wager – a bet he made with ecologist Paul Ehrlich in 1980. Ehrlich predicted that the prices of five metals would rise over a decade due to increasing scarcity, while Simon took the opposite position. Simon won, as prices for all five metals declined sharply during that period.

Simon’s work remains controversial. Critics have pointed to profound mistakes and exaggerations in his ideas, particularly his denial of resource finitude and his dismissal of both ecological science and entropy. Still, his emphasis on human creativity as a resource – and his challenge to automatic pessimism about growth – forced environmental thinkers to sharpen their arguments considerably.

Pigou and the economics of market failure 🔗

Arthur Cecil Pigou made a contribution that fundamentally changed how economists think about environmental problems. In his 1920 book The Economics of Welfare, Pigou developed Alfred Marshall’s concept of externalities – costs imposed or benefits conferred on others that are not accounted for by the person taking the action.

Pigou argued that the existence of externalities provides sufficient justification for government intervention. If a factory pollutes a river, the cost of that pollution falls on downstream communities, not on the factory owner. Pigou’s solution was elegantly simple: tax the polluter to make them bear the true social cost of their activity. These Pigouvian taxes remain a cornerstone of environmental policy today, from carbon taxes to congestion charges.

Pigou’s pricing principles have had an enduring influence on academic debate, with a widespread consensus among economists that such taxes are among the most efficient tools for addressing pollution. His framework essentially gave economists a language to talk about environmental harm as a form of market failure – something the market couldn’t fix on its own.

Hotelling and the economics of exhaustible resources 🔗

Harold Hotelling took resource economics in a more mathematical direction. In his landmark 1931 paper, he formulated what is now known as Hotelling’s Rule. The rule states that for efficient exploitation of a non-renewable resource, the net price (market price minus extraction cost) should rise at the rate of interest over time.

The logic is intuitive: if you own a finite resource, you have a choice – extract and sell it today, or leave it in the ground and sell it later at a higher price. Hotelling’s rule defines the optimal price path that maximises the total economic value extracted from a finite resource over its entire depletion period. This framework became the theoretical core of non-renewable resource economics and influenced everything from oil pricing models to debates about intergenerational equity.

While empirical tests have shown that real-world resource prices don’t always follow the neat path Hotelling predicted – largely due to technological change, new discoveries, and shifting market structures – his work established the principle that resource scarcity has an economic cost that should be factored into decision-making.

Darwin, Haeckel, and the ecological foundations 🔗

The relationship between economics and ecology wasn’t just a one-way street. Charles Darwin’s theory of evolution by natural selection, published in 1859, drew heavily on economic thinking – particularly Malthus’s ideas about population pressure and competition for scarce resources. Darwin applied these concepts to the natural world, showing how species compete for limited resources and how only the best-adapted survive.

Ernst Haeckel, a German biologist and devoted follower of Darwin, coined the term “ecology” itself in 1866. He defined it as the study of relationships between organisms and their environment – essentially the science of nature’s economy. The word ecology shares its Greek root (oikos, meaning “household”) with economics, reflecting the deep conceptual connection between managing a household and managing natural systems.

Alfred J. Lotka and the thermodynamics of life 🔗

Alfred J. Lotka bridged ecology, physics, and economics in a way few others have managed. In his 1925 book Elements of Physical Biology, Lotka applied the principles of thermodynamics to living systems, organising his ideas around the unity and universality of physical laws. He is best known for the Lotka-Volterra equations of predator-prey dynamics, still widely used in ecology today.

But Lotka’s most forward-looking contribution was his analysis of energy flows. He suggested that the shift from reliance on solar energy to non-renewable energy would pose unique and fundamental challenges to society, making him an important forerunner to biophysical economics and ecological economics. Lotka argued that natural selection leads systems to maximise energy throughput – a principle later developed by ecologist Howard Odum into the maximum power principle. This thermodynamic perspective revealed that both economies and ecosystems are governed by the same fundamental laws of energy and entropy.

Why this history matters today 🔗

The evolution from Adam Smith to Alfred Lotka reveals something important: the separation of economics from ecology is a relatively recent development, and it was never complete. Classical economists took land and natural resources seriously. Malthus warned about population limits. Mill imagined a steady-state economy. Jevons identified the paradox of energy efficiency. Pigou gave us tools to price environmental damage. Hotelling modelled the economics of finite resources. And Lotka showed that economies and ecosystems follow the same physical laws.

Starting in the 19th century, land was de-emphasised in economic theory in favour of labour and capital, and mainstream economic training no longer requires study of natural capital and ecosystem services. The result is an economics profession that often treats the environment as an afterthought – an “externality” rather than the foundation on which all economic activity rests.

Ecological economics, as a field, seeks to reverse this. It draws on the full history outlined here – from Smith’s acknowledgement of natural capital, through Jevons’s energy analysis, to Lotka’s thermodynamic perspective – to build an economics that respects planetary boundaries. The thinkers covered in this post weren’t just economists or just ecologists. They were grappling with the same question we face today: how do we create prosperity without destroying the natural systems that make prosperity possible?

What do you think? Can modern economics truly integrate ecological limits into its core frameworks, or will it always treat the environment as something external to the economy? And whose ideas from this history – Malthus’s warnings, Mill’s steady state, or Simon’s optimism – do you think are most relevant to today’s sustainability challenges?

References

1. https://en.wikipedia.org/wiki/Adam_Smith
2. https://www.taylorfrancis.com/chapters/edit/10.4324/9781003375425-3/adam-smith-ecological-economist-leo-steeds
3. https://www.cambridge.org/core/journals/historical-journal/article/abs/coal-question-before-jevons/2D0CE02B59B75ADC31216326A2A5BCC5
4. https://en.wikipedia.org/wiki/Julian_Simon
5. https://www.econlib.org/library/Enc/bios/Pigou.html
6. https://www.journals.uchicago.edu/doi/10.1093/reep/ren017
7. https://royalsocietypublishing.org/doi/10.1098/rsta.2022.0290