Water is a necessity to life as institutions are to social, environment, and economic order; institutions shape values of a society. Values, norms, beliefs, and conventions are derived from world views and perceptions of a society. Examining nature’s importance for human well-being is not an easy task; there is no single solution to challenges facing humankind. Nonetheless, institutions create a conducive environment to achieve solutions. Neoclassical economists suggest that to solve environmental degradation, we need to subject nature to the same treatment like any other good, tradable on the market. On the contrary, institutional economists argue that to solve the problem of environmental degradation, we need to understand the power play in society; power that shape behaviour, values, and perception. Institutions are necessary for handling social-environmental issues such as biodiversity loss.
The embededness of the economy in the environment has warranted regulators to turn to economic approaches for environmental protection, historically more neo-classical approaches and more recently with acknowledgement of the institutional role. While neoclassical economists have argued that markets and property rights can reduce biodiversity loss, institutional economists contend that institutions play a crucial role in the management of biodiversity through policies and conservation practices.
It is a rather recent phenomenon that we see issues of our time such as climate change or loss in biodiversity increasingly expressed as a market issue. So the question is when are markets, proper institutions and when are they not? Neoclassical economics portrays human beings as simply rational, self-interested, and utility maximising. On the other hand, institutional economics, both accepts and rejects neoclassical assumptions. However, institutional economics generally depicts humans as a product of their surroundings, institutions influence choices and actions. Socioeconomic activities are determined by a combination of individual cognition and institutions.
The essay primarily uses literature review of secondary data and the aim of the essay is to set forth the role of institutions in environmental management, particularly by drawing a comparison to both the neoclassical and institutional approaches as applied specifically to biodiversity management. Ultimately, the essay will seek to elaborate on how the two approaches complement each other. The essay restricts itself to institutions as formalised rules such as environmental policies, laws, and conventions. The essay is divided into three sections: the first section presents a brief definition of the institutional and neoclassical economic perspectives. The section draws some theoretical perspectives that the institutional school has contributed to the environment using the work of Arild Vatn as the basis for analysis. The second section applies the above mentioned perspectives to biodiversity loss and its management. In conclusion, the essay will summarise the central institutional economics and neoclassical aspects of the TEEB report and contrast the two approaches. In this way the paper aims to illustrate how a combination of neoclassical and institutional approaches can provide a rich policy framework for biodiversity conservation.
According to Soderbaum (1990,484), our thinking and habits in relation to economics is a potential factor contributing to environmental problems. While biodiversity conservation itself is not a behaviour, but a practice, the efficient use of natural resources and the human activities that are responsible for the loss in biodiversity may be categorised as a form of behaviour. For purposes of this essay a behaviour is defined as the way in which people behave in response to a particular situation or stimulus.
In the 1930s there was dwindling interest in institutional economics, which was only revived in the 1960s. At this time, the classical institutional school developed as a reaction to the hegemony of the neoclassical school. There was resistance towards neoclassical axioms within the Institutional school, for example, and most notably, Thorstein Veblen challenged the tendency to make economics the study of abstract equilibrium based on axioms of individuals with fixed preferences. Later, in the 1960s a few economists within the neoclassical school acknowledged the institutional perspective, creating New Institutional Economics (NIE). NIE is built on neo- classical foundations with somewhat similar approaches to the environmental management, based on markets such as property rights. With regards to biodiversity, NIE contends the main problem facing biodiversity is that many products and services linked to biodiversity are either non-excludable or non-rival in consumption therefore there are no clear property rights. If property rights were clearly defined to indicate the true value, then biodiversity loss would be mitigated (OECD 2003).
It is beyond the scope of this paper to comprehensively differentiate the NIE from the Classical Traditional Institutional approach, nonetheless in this section, the essay briefly describes the difference in perspectives within the Institutional economics school.
There is neither a clear-cut nor agreed upon definition of institutions within the sciences perhaps due to the differences in interpretation of behaviour; there are several theories about the character and role of institutions. For example, North (1991,97) defines institutions as humanly devised constraints that structure, political, economic and social interactions while according to a 2006 article, Hodgson(2) defines institutions as structures within the social realm that make up the stuff of social life. In other words, institutions as systems of established and prevalent social rules that structure social interactions. Institutions are important as they enable and constrain people to act by defining the kind of actions under different circumstances; institutions are important for the creation of common, simplification of frameworks for action (Vatn 2005,1- 300).
Institutional economics assumes an evolutionary path based on social changes at the aggregate level; Institutional structures facilitate and act as a platform where social change occurs. Institutional economics recognises that economic systems change; economies learn, adapt, and select processes based on constantly changing resource base that affects human use. The approach rejects the neo-classical methodological individualism and argue that individual preferences are not purely cognitive but influenced by institutions. Individuals are shaped by institutional and cultural arrangements.
Institutional perspective of the environment
To understand institutions, it is helpful to look at the relationship between individuals and society.; the conundrum between structures and agency.