Ecological Economics 70 (2010) 375–383

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Ecological Economics

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Analysis

An entrepreneurial model of economic and environmental co-evolution

Jason Potts a,b,⁎, John Foster a, Anna Straton c

a School of Economics, University of Queensland, Brisbane, Australiab ARC Centre of Creative Industries and Innovation, Queensland University of Technology, Australiac CSIRO Sustainable Ecosystems, Melbourne, Australia

⁎ Corresponding author. School of Economics, UniveAustralia.

E-mail address: j.potts@uq.edu.au (J. Potts).

0921-8009/$ – see front matter © 2010 Elsevier B.V. Aldoi:10.1016/j.ecolecon.2010.09.009

a b s t r a c t

a r t i c l e i n f o

Article history:Received 2 January 2010Received in revised form 22 August 2010Accepted 1 September 2010Available online 8 October 2010

Keywords:Economic evolutionEntrepreneurshipSustainable economic growth

A basic tenet of ecological economics is that economic growth and development are ultimately constrained byenvironmental carrying capacities. It is from this basis that notions of a sustainable economy and ofsustainable economic development emerge to undergird the “standard model” of ecological economics.However, the belief in “hard” environmental constraints may be obscuring the important role of theentrepreneur in the co-evolution of economic and environmental relations, and hence limiting or distortingthe analytic focus of ecological economics and the range of policy options that are considered for sustainableeconomic development. This paper outlines a co-evolutionary model of the dynamics of economic andecological systems as connected by entrepreneurial behaviour. We then discuss some of the key analytic andpolicy implications.

rsity of Queensland, Brisbane,

l rights reserved.

© 2010 Elsevier B.V. All rights reserved.

1. Reconciling Economic and Environmental Dynamics

“Establishing the relationship between economic performance andecological performance”, venture Boons and Wagner (2009: 1908),“resembles something like finding the Holy Grail.” Ecologicaleconomics is the scientific research program at the core of thisendeavour to elucidate the structure and dynamics of the complexeconomic–ecological relationship. It does so by mapping andmodelling energy and material flows, system resilience, economicand socio-cultural behaviours, institutions and co-evolutionaryprocesses (Norgaard, 1985; Ayres, 1994; Gowdy, 1994; Perrings,1998; van den Bergh and van der Straaten, 1997; van den Bergh andGowdy, 2000; Krausmann et al., 2009; Ayres and Warr, 2009). A basictenet of ecological economics is that economic growth and develop-ment are ultimately constrained by environmental carrying capaci-ties. It is from this basis that notions of a sustainable economy and ofsustainable economic development emerge to undergird the “stan-dard model” of ecological economics. However, the widespread beliefin “hard” environmental constraints may be obscuring the importantrole of entrepreneurship in co-evolutionary interactions between theeconomy and the environment. If this is the case, it may havedistorted the analytic focus of ecological economics in a way that haslimited the range of policy options explored for achieving sustainableeconomic development.

The belief that economic growth and development are ultimatelyconstrained by hard environmental and ecological limits is well-established in the field of ecological economics. This “ultimatescarcity” argument is commonly formulated in terms of the limits toloadings on ecological services (Arrow et al., 1995; Costanza et al.,1997). Ecological constraints thus define long-run limits on economicevolution and growth. This reinstates J.S Mill's concept of thetendency towards a stationary state, but conceived ecologically,rather than technologically. This argument can be traced back to theresource constraint concerns of Thomas Malthus and William StanleyJevons, among others, through to the modern work of NicholasGeorgescu-Roegen (1971) and Kenneth Boulding (1978) and viaecological conceptions of environmental limits to economic growth(Daly, 1973, 1996). This is “spaceship-earth economics,” usingBoulding's (1966) felicitous phrase, in which the fundamental limitsto economic development and growth are ultimately constrained byenvironmental carrying capacities and system resilience.

So the economy is locally and globally dependent upon the naturalenvironment, sine qua non. Seeking a sustainable economy andsustainable economic development thus underpin the “standardmodel” of ecological economics. This, in turn, defines an overarchingresearch program, viz. Boons andWagner's search for the “Holy Grail”,in terms of a quest for the critical technical and institutional rules thatyield a sustainable economy. Such rules involve consideration ofbehaviours, strategies, technologies, institutions and policy settings(Arrow et al., 1995, 2004; Ayres, 2008). As such, inquiry into theoperational and institutional properties of such a sustainableeconomic model—and by “sustainable” we refer to the capacity ofthe environment to sustain human life and current levels of economicactivity without degrading the quality of environmental services—and

2 Dean and McMullin (2007) and Cohen and Winn (2007) argue that there is a role

376 J. Potts et al. / Ecological Economics 70 (2010) 375–383

the pathways by which we might achieve them is, thus, rightfullycentral to the research program and indeed the normative conceptionof ecological economics.

The necessity to consider the complex interaction of institutional,technological and industrial dynamics means that ecological econom-ics can profitably draw upon perspectives and findings of evolutionaryeconomics. In particular, Gowdy (1994), van den Bergh and Gowdy(2000), van den Bergh (2007) and Buenstorf (2000) have all drawnuseful and insightful attention to the many distinct commonalitiesbetween evolutionary and ecological economics, including populationmethods, complex systems analysis, energetic flows and other suchcorrespondences. They argue that evolutionary economics canprovide greater insight into the properties and characteristics of asustainable economy than neoclassical economics. This is due to thespecific attention that evolutionary economists pay to such conceptsas endogenous preferences, differential selection and industrialdynamics, self-organization, entropy and economic evolution, andinstitutional and technological co-evolution. In this vein, a recentspecial section in the journal, Ecological Economics, has attempted toreignite a co-evolutionary research agenda for ecological economics(Kallis and Norgaard, 2010). Thus, it would seem uncontentious thatevolutionary economics and ecological economics should be viewedas contiguous fields with (evolving) ecological systems defining theultimate constraints for (evolving) economic systems (Perrings, 1998;van den Bergh and Gowdy, 2000). However, despite this, Kallis andNorgaard argue that the co-evolutionary approach “has not taken offwithin ecological economics” (2010: 690).

We here prompt a new discussion by exploring the co-evolution-ary perspective on whether the existence of a hard ecologicalconstraint is actually true. As a further development of argumentsencountered in the nature vs. culture, or limits to growth debate(Meadows et al., 1972; Cole et al., 1973; Meadows et al., 1992; Ekins,1993; Nordhaus, 1994; Costanza, 2000; Costanza et al., 2000;Meadows et al., 2004), an alternative perspective can be assembledby recognising that the environmental or ecological constraint maynot always be hard, but only apparently so. For example, an ecologicalconstraint may become apparent as a problem before it impacts fullyupon economic activity. Typically, such constraints take the form oflooming resource scarcities or increasing stress loadings on particularenvironmental services. Evolutionary economics tells us that, if thereis adequate information and the problem is not entirely “locked in”,adaptive behaviour is likely to be manifest in such circumstances.Exploratory searches will occur and innovative solutions will emerge.Those who engage in this kind of activity are “entrepreneurial”—theylook to create value in states of uncertainty where market signals areweak or non-existent.1 An act of entrepreneurship can ameliorate anenvironmental constraint, rather than just being limited by it(Rammel, 2003). There are multiple ways that this might be achieved:for example by shifting resources, by making resource substitutions,by bringing new technologies or business models to bear on theproblem, or by new forms of contracts, organizations or institutions.The emergence of an environmental constraint can, thus, offerentrepreneurial agents opportunities. There are many examples ofthe operation of this “entrepreneurial loop” in evolutionary econom-ics and in the related field of innovation economics. There is no reasonwhy such a loop should not also operate at the interface of economicand ecological dynamics. In considering such a possibility, we mayarrive at a very different sense of the mechanisms that dynamicallyconnect economic and environmental systems.

The defining feature of this alternate perspective is that the “fast”evolutionary dynamics of the growth of knowledge process, mani-

1 There is a large literature on what is meant by “entrepreneurship”. See, forexample, Shane and Venkataraman (2000) and Shane et al. (2003). It is not ourintention to go beyond our general definition here since this is adequate for ourpurposes in this article.

fested in, for example, economic evolution and associated creativedestruction, comes to dominate the “slow” evolutionary dynamics ofthe ecosystem, weakening its resilience (Gual and Norgaard, 2010).The knowledge-base of the economic system is ever-changing and“restless” (Metcalfe, 1998). This pushes the system towards aserviceable or “bounded environment” that is sufficient for mostpurposes or “good enough”, but not more-so; although it may not bethe most efficient state, it need not contain “slack” (cf. Leibenstein,1978). The properties of ecosystems are affected by revealedpreferences for environmental qualities, services, etc., but this is notnecessarily an “optimal” state and, as such, it is amenable to structuraladaptation. From this perspective, the observation of growingenvironmental damage or the onset of an impending ecologicalcollapse can present entrepreneurial opportunities. Note that wespecifically say “the onset of”, and do not refer to a final state ofecological collapse. This is because those states do not alwayseventuate, most notably in those societies where entrepreneurialbehaviour is encouraged. The entrepreneurial mechanism, in appro-priate conditions, can initiate structural adaptations on the basis of anexpectation of an impending collapse. Entrepreneurs seek out ways toprovide innovative solutions that can be traded profitably and, to dothis, newly created market mechanisms and associated institutionalarrangements often have to emerge.What is conventionally viewed asa “negative externality” can be removed by entrepreneurial actionsthat permit those who feel damaged to purchase goods and servicesthat fix the problem, perhaps not entirely, but enough to avertdisaster.

Conventional economists think of the presence of a negativeexternality as evidence of a “market failure” usually attributed to thepresence of “transactions costs” (Demsetz, 1970).2 But markets thathave never existed can't fail. Emergent environmental problemsrequire new responses in states of uncertainty. It is entrepreneurs thatmake such responses and, in so doing, they both create and use newmarkets. When this happens, we have market success, not theremoval of market failure. When we adopt such an evolutionaryperspective, it becomes clear that entrepreneurship cannot be limitedto the economic domain; such conditions can also present entrepre-neurial opportunities in the political, creative or the socio-culturaldomains, or perhaps in all three. And these can all be criticallyimportant in making economic entrepreneurship possible. Baumoland Strom (2010) cite historical evidence that much of entrepre-neurship prior to the 18th centurywas in these domains with rewardsin the form of power and status.3 Entrepreneurial opportunities in theeconomic, creative, political and socio-cultural domains can thus leadto different forms of change. If conditions are right, these can integrateto produce complex adaptations that can anticipate and mitigateenvironmental change.

Entrepreneurial action thus has a dual impact. Entrepreneurialsuccess in introducing innovations and generating economic growthcauses environmental stresses in an unintended manner but entre-preneurs may also respond to the value creating opportunities thatsuch stresses offer. Thus, we can have a process of cumulativecausation where entrepreneurial activity, in states of uncertainty,leads to unintended negative environmental effects which, whenrevealed, stimulate entrepreneurial activity that mitigates sucheffects. And on it goes, with each new solution inducing new anddifferent environmental problems that in turn create new economicopportunities. Thus, the notion of convergence upon a global“stationary state” at an environmental limit is not always helpful.

for entrepreneurship in mitigating environmental degradation from a conventional“market failure” economic perspective. However, we feel that the latter is too narrowbecause it lacks an adequate evolutionary dimension in which the full scope and intentof entrepreneurship can be expressed.

3 Dees (2001), Mort et al. (2003) and Zahra et al. (2009) also discuss this notion of“social entrepreneurship” and provide examples of its operation in history.

377J. Potts et al. / Ecological Economics 70 (2010) 375–383

Equally, it becomes difficult to knowhow to definewhat a long-period“sustainable economy” (Krausmann et al., 2009; cf. Gowdy, 1994) is atany point in economy–environment co-evolution and what itsstability properties might be. In complex systems, saying anythingdefinite about long periods is difficult. For example, Malthus clearlyunder-estimated the power of innovating entrepreneurs but Diamond(2005) gives us several examples of societies that collapsed in the faceof hard environmental constraints.

The historical evidence points to the fact that humans are bothecologically destructive (Penn, 2003) as well as entrepreneurial inresponse to opportunities. But these tendencies are connected: awidespread expectation of ecological destruction alerts entrepreneursto new opportunities (Boons and Wagner, 2009). This can happen inmany ways. It is common, for example, in ecological economics torecognise the primacy of the incentive effect of environmentalregulations on induced technical innovations and entrepreneurship(Rennings, 2000; Beise and Rennings, 2005). But there are otherpathways via direct market signals, as well as indirectly via socio-cultural pathways, yieldingmultiple opportunities for entrepreneurialresponses to ongoing challenges posed by environmental degrada-tion. Regulatory adaptation is often slow, so these other pathways canbe critical. Indeed, regulatory change can be an endogenous, laggedresponse to movements along these other pathways. If entrepreneur-ship is, indeed, responsive to perceptions of environmental degrada-tion, it can be argued that a co-evolutionary connection existsbetween economic and ecological systems. This co-evolution centresupon the growth of knowledge about environmental degradation andthe capacities of entrepreneurs to take the opportunities that arepresented.

Environmental and ecological problems are omnipresent, butentrepreneurial actions can solve them if prevailing socioeconomicand cultural rules permit them to do so. Entrepreneurs do not usuallyrespond directly to information concerning degradation but, instead,react to information about its impacts upon human welfare andwellbeing. Price signals often translate a problem into economicterms. For example, when overfishing seriously reduces fish stocks,fish prices usually rise to unprecedented levels. Entrepreneurs whoanticipate that fish will be in short supply, either because of stockexhaustion or severe governmental restrictions on fishing, will seeopportunities to invest in sustainable fish farming. This maintains fishsupply while removing environmental pressure. However, this is notpossible without adequate flows of information, appropriate regula-tory frameworks and the existence of viable market institutions.Because we live in a highly dynamic set of interconnected complexsystems, uncertainty prevails and there is continuous lurching fromone environmental crisis to the next. Each ecological crisis is theunintended consequence of previous economic innovations which, inturn, can be resolved by new economic innovations. So while Gowdy,van den Bergh and Buenstorf et al. do correctly elucidate the benefitsof integrating evolutionary economics and ecological economics, theynevertheless underplay the self-organizational feedback implicationsof entrepreneurial activity. Although governments can devise regu-latory frameworks that facilitate the process of environmentalprotection and regeneration they cannot act as rapidly as entrepre-neurs in introducing the necessary innovations and inducing theassociated creative destruction. Governments are constrained andslowed by vested interests; entrepreneurs destroy such interests.

2. Elements of a Model

What then are the elements of a co-evolutionary model of thecomplex interactions and evolutionary dynamics of economic andecological systems?

First, it is necessary to acknowledge that the environmentaldegradation that we observe is, ultimately, due to the use of freeenergy flow to drive economic activities that yield goods and services

to growing populations. Such degradation is a manifestation of theentropy process that must, necessarily, accompany increasing orderand complexity in economic systems (Ayres and Warr, 2009; Foster,2010). This perspective was popularised by Georgescu-Roegen (1971)and generalised to an open, dissipative system context in Foster(1996) and Raine et al. (2006). Spaceship earth travels according tothe laws of physics, whereby large energetic transformations mustsatisfy the second law of thermodynamics. Economic evolution thusruns up an energetic gradient (Schneider and Sagan, 2005). Increasedenergetic throughput is associated not only with an increasedquantity of energy conversion but also with changes in the qualityof the energetic form, as in the highly controlled use of energy formoving electrons or photons in precise ways to perform computation(Huber and Mills, 2004). Thus, economic growth and associatedenvironmental consequences are outcomes of a co-evolutionaryprocess, whereby there is an increase in energy flow that is drivenby an increase in the application of new knowledge. Becauseentrepreneurs that apply such knowledge are engaged in a discoveryprocess, theymust, necessarily, make their decisions in uncertainty. Inthis pioneering capacity, they are the key initiating actors ingenerating economic growth from the intelligent use of free energy.But, in addition to increasing the use of energy, they have also beenkey players in the introduction of innovations that have resulted inmore efficient energy use. Thus, entrepreneurs have always had adecisive role to play in energy-entropy processes in economicsystems.

Second, our model must recognise that environmental resourcedepletion and degradation in ecological systems and services presentnew opportunities for creative human actions. Economists commonlyconceptualise this negatively in terms of increased scarcity, i.e. actionin response to a rise in the price of a factor, inducing reduced use ofthat factor relative to others. But, as we have discussed, price risesmay also lead to longer term thinking about how to achieve a goal in adifferent way. Invention and innovation can result in new connectionsand combinations that can generate value or new ways of creatingvalue. There are no hard environmental constraints on economicevolution and there are no hard economic constraints on naturalevolution. Economic evolution is a fast process that modifies thenatural environment while natural evolution is a slow process thatcan inflict catastrophic impacts on human society in the longer term.Knowledge of the possibility of the latter provides entrepreneurialopportunities, for example, in developing alternative energy sourcesand introducing carbon trading.

Third, our model must recognise that increasing complexity in theset of institutional rules that are operative in an evolving economicsystem is an outcome of the co-evolving economic–ecological process.As ecological systems become stressed by the growth of economicsystems, the latter can respond by becomingmore (not less) complex.The presumption that environmental stresses lead inexorably toeconomic stress, as in the Malthusian hypothesis, involves a falseecosystem analogy where a species in a diminished environmentcannot respond “entrepreneurially” by creating and implementingnew technologies, organisational structures and institutional rules.Instead, population dynamics over extant variety is the primeecological mechanism of resolution. Although we can find historicexamples where economic exploitation has wholly depleted a naturalenvironmental niche, we can also find cases where depletion did notoccur because of adaptive, forward-looking behaviour by entrepre-neurial risk-takers.

Subject to prevailing cultural, legal and political constraints,economic entrepreneurs can create new organisations, institutionsand technologies that can resolve environmental problems. This mayseem counter-intuitive if it is increased economic activity that causesenvironmental problems in the first place. So to suppose that furtherincreases in economic activity might resolve these problems mayseem perverse. But “economic activity” is not homogenous over time;

Fig. 1. Economic and environmental co-evolution.

378 J. Potts et al. / Ecological Economics 70 (2010) 375–383

it is adaptive and can change qualitatively. This does not deny thatnew activities will not create new environmental and ecologicalproblems—for they almost certainly will—but the point is that theseare mostly unknown or latent and cannot be anticipated in cost–benefit calculations. Economic and ecological systems are qualita-tively different complex systems—the former has a creative andadaptive capacity that the latter lacks (Foster, 2005).

Fourth, our model must recognise that the political arena in such aco-evolvingworld is one of several possible spaces where endogenousaction can occur in response to changes in current or anticipatedenvironmental circumstances. Environmental constraints and ecolog-ical problems present emergent opportunities for political entrepre-neurs who see political gains from being seen to be solving suchproblems (Lachmann, 1986). There may also be behavioural or socio-cultural change (i.e. changed preferences induced by changed modelsof behaviour that are then adopted) driven by socio-culturalentrepreneurs. And, all the while, we have creative entrepreneurs—inventors, scientists and writers who seek the joys of discovery andrecognition—adding to the stock of knowledge which can beemployed innovatively by entrepreneurs. Once we realise thatdifferent kinds of entrepreneurship operate when opportunitiesarise and that these are connected, it becomes clear that we aredealing with a complex system which cannot be captured inconventional economic analysis.

3. The Dynamic Structure of Ecological and Economic Co-evolution

Economic activity is always embedded in an ecological context. It is“squeezed” at the margin as increased environmental scarcities causeprice rises. These induce substitution toward economic activities withlowered environmental impact. But there is nothing automatic aboutsuch substitutions in complex contexts since they always involveuncertainty. It is here that standard economics, applying constrainedoptimization, can be highly misleading because too strong assump-tions are made about knowledge and risk. The substitution of onetechnology or organisational structure for another is a difficult matterand history is littered with failures. Decisions must be taken that arecomplementary over five co-evolving complex systems:

1. the economic system2. the political system3. the creative system4. the socio-cultural system5. the ecological system

These are connected through multiple interactions and feedbacks.As such, any model of this co-evolution must have the following threemechanisms:

1. how economic systems evolve2. how ecological systems respond (i.e. the ecological part of

ecological economics)3. how political, socio-cultural and creative systems respond to

ecological change caused by economic evolution

We sketch the structure of our co-evolutionary model in Fig. 1,building on Dopfer and Potts (2008). In the beginning, there is aninnovation, derived from a new entrepreneurial idea that turns out tobe profitable. As this successful idea is adopted by others it becomes ageneric, or “meso”, rule. The adoption of this rule by a populationchanges the structure and level of resource use (this is termed a “mesotrajectory”). Eventually, this results in a set of environmental andecological impacts.When the environment is perceived to be sufferingsignificant damage, new entrepreneurial opportunities may emerge(Shackle, 1972). However, inasmuch as new actions emerge to resolvethat problem, new problems are, in turn, created (Arthur, 2009). Sothe co-evolutionary process can continue as one of emergentcumulative causation with many possible end states.

In constructing a co-evolutionary model, we employ the “micromeso macro” analytical framework (Dopfer et al., 2004; Dopfer, 2005;Dopfer and Potts, 2008). In this framework, the economic system isviewed as having at its core an interconnected system of shared rules.The application of these rules in a diverse range of microeconomiccontexts results in the generation of value which can be aggregated atthe macroeconomic level of inquiry. Economic evolution occurs whennew rules to generate value are applied successfully at the micro-economic level by novel entrepreneurial actions. These rules spread asthey are taken up by a population of adopters. At the same time, somerules fall out of favour and decline in importance. What the micro–meso–macro framework does is depict the economy as a networkstructure where “creative destruction” is concerned with the comingand going of rules.

We can start with an initial state where there is an economic orderthat is coordinated by a set of generic (meso) rules. Each rule (Mi) iscarried byapopulation ofmicro agents (Ai) SoM={M1,M2,…Mi,…Mn)is the vector of shared rules at any point in time. However, theseelements are not independent of each other, thus M contains theconnective network structure of an economic order. The importance ofany rule depends on the size of its population, soA={A1, A2,….Ai,…An}where A is the vector of populations for each meso rule. Again theelements are not independent—an individual can belong to more thanone population so we have a connective network between people andbetween the various memberships that individuals have. Economicevolution involves the expansion of theM set (more rule variety). A setexpansion (more people using the connective rules in an economicorder or individuals using more “economic” rules) involves a diffusionprocess typical of economic development. Core meso rules have largepopulationsof adopters over significantperiodsof timewhile peripheralmeso rules have smaller, more short-lived populations. So meso rulestend to be hierarchically connected. As populations of adopters rise andfall, so the composition of M changes. Thus, the content of knowledgerelevant to economic action changes both qualitatively in M andquantitatively in terms of populations in A. This “knowledge economy”is capable of transforming human energy, physical energy and naturalresources into flows and stocks of goods and services.

Economic evolution is defined as a change in the setM→M′ by theorigination, adoption and retention of a new generic rule Mi+1. Thisso-called “meso trajectory” (Dopfer et al., 2004; Dopfer and Potts,2008: chapter 4) defines economic evolution as the process by whicha new “generic rule”, forming from a new idea, technology, orbusiness model, results in the transformation of the generic structureof the economic order to M′. This involves “creative destruction”whereby rules are adopted and abandoned by populations, dependingon their usefulness. This does not occur directly but, rather, through

379J. Potts et al. / Ecological Economics 70 (2010) 375–383

the competitive selection of goods and services that are created byapplying sets of rules. The application of rules involves a process ofcreative self-organisation that yields structures that are, necessarily,incompletely connected and, thus, diverse. So there emerges a widevariety of goods and services in a range of niches. Competitiveselection of such goods and services is driven by consumer choicewhich, in turn, is influenced by meso rules on the demand-side. Forexample, a fashion meso rule, such as, for example, a “short trouserrule”may bewidely adopted. A large variety of short trousers are thenproduced and sold. When this fashion has run its course, the “shorttrouser” rule disappears but the “trousers should have two legs rule”remains. Thus, meso rules tend to be hierarchical with long-lived onesproviding platforms for short-lived ones. Trouser producers who donot adapt to the demand-sidemeso rule change go out of business andthere begins a new producer race to produce the most attractive and/or competitively priced long trousers. Typically, this involves theongoing introduction of new production techniques and equipmentby entrepreneurs, embodying new technological or organisationalmeso rules.

InM, there are particular rules that relate to the exploitation of thenatural environment. Generally, it has been accepted in humancivilizations, at least since the hunter–gatherer era, that the naturalenvironment is an exploitable resource to be degraded at will to meetagricultural, industrial and urbanisation needs. So we have hadecological degradation (E→E′) where E is an ecological order that iscomposed of a complex set of biological and physio-chemicalconnections. It degrades because natural evolution is too slow toadapt to fast moving economic evolution. However, now that we haverepresented the economy as the outcome of adherence to a system ofmeso rules, each of which originally emerges from an act of creativityby an entrepreneur of some kind, we know that environmentaldegradation is not automatic because, at some point, there emerges ispotential value in reversing it We know that exploiting a naturalresource, such as a fish stock to the point of extinction is not rational,even using standard investment appraisal techniques. But we can findexamples where this has happened. The standard view is that a“market failure” exists that can be rectified by rational economicagents. Here we take a different view; what is lacking is a set of mesorules relating to environmental protection with significant popula-tions of adopters. One of these rules may well be the absence of amarket institution but it is generally the case that a much larger set ofrules is required and to bring these into existence requires a diverserange of entrepreneurs.

In standard economics, the economy is viewed as a system ofmarkets in which people seek to maximize the “utility” they enjoyfrom consuming goods and services. Foster (2010), instead, arguesthat the economic system and its subsystems (including people) aredissipative structures, and, as such, are better viewed as beingimpelled to throughput free energy. Our capacity to accumulate anduse knowledge both assists us to do this and also enables us to controlthe extent to which we do it in order that we can enjoy the fruits ofenergy throughput over the long time horizons of future generations.This was strongly embedded in religious and ceremonial meso rules inhunter–gatherer societies which were environmentally sustainablebut are less in evidence in modern, socially and geneticallyfragmented urban societies. In complex urban societies, the mesorules we live by take little account of the environmental degradationimplied by our consumption levels and patterns. In under-developedcountries, farmers andminers living at a poor subsistence level cannothave the luxury of adhering to meso rules that involve environmentalprotection either.

Individuals cannot change their behavioural patterns in anyfundamental way because of the “locked in” nature of the rulestructured system in which they have to operate. This can onlyhappen if there is a fundamental meso rule shift. There are manyongoing peripheral and transient rule shifts as fashions come and go.

So people concerned about global warming may install a PV unit andswitch off the lights more and this behaviour may, to some extent,spread. But fundamental rule shifting requires very significantentrepreneurial effort whereby there is a drive to secure value ofsome kind beyond just personal satisfaction. This is often difficult tokick start because prevailing meso rules, evolved for other purposes,can inhibit the emergence of new meso rules. So reversingenvironmental degradation requires major meso rule surgery notband aid solutions. We have seen in the debates concerning theintroduction of policies to mitigate carbon emissions that it iscomparatively easy for climate change denialists to discredit scientificfindings by appealing to existing meso rule sets that we arecomfortable with. Unfortunately, many scientists think, naively, thatit is the weight of evidence that is decisive, not the content of mesorules.

Advertising agencies have always clearly understood the key roleof meso rules. So when economists talk of correcting “market failure,”“negative externalities” and “public good problems” the generalpublic cannot relate to it. So it is also naïve to imagine thatenvironmental problems can be fixed by removing supposed marketfailures and relying only on price incentives. The public is correct to besuspicious of such proposals from economists. What really matters isthe existence of entrepreneurial actions to shift meso rules infundamental ways. So organisations such as Greenpeace play a keyrole in promoting new meso rules in the environmental space which,when they are perceived to have been adopted widely, are likely to bereflected in appropriate policies that politicians deem to be electorallysafe. However, such policies can be of two distinct kinds; those whichjust prohibit certain activities and those that provide explicitincentives for economic entrepreneurship to do the job. Economiststend think of such incentives in terms of monetary incentives but,when we are dealing with entrepreneurship in states of uncertainty,these turn out to be only a small part of the story, particularly in theearly stages of meso rule shifts.

For example, the advance of women's rights over the past centurywas won by changing meso rules through socio-cultural movementspromoting female voting and later feminism movements to secureequal rights for women. These did not stem from the parliamentarypolitical process but were eventually embraced by it, when it wasdeemed safe to do so, and informal meso rules then became embodiedin law. These laws did not prohibit the employment of men but theydid ensure that wage discrimination in comparable occupations waseventually eliminated. The main economic incentive for entrepre-neurial employers was not a price incentive but rather the incentive totake advantage of the increasing availability of well-educated andtrained women with an independent capacity to pursue a career. Thisinvolved a fundamental shift in the meso rules adopted by firmsconcerning the role and status of women.

So the key to environmental protection is not findingways tomakesupposedly failed markets work but discovering ways to allow andencourage entrepreneurs to devise and apply rules to reverseenvironmental degradation that are potentially profitable and capableof diffusing into meso rules with large scale adopting populations.Whether this can happen depends critically upon the extent to whichvested interests allow new rules to be devised and applied. Here weobserve wide variations throughout history but also an increasedtolerance of entrepreneurial activity as we have moved towards moreopen, democratic societies.

Economic value is generated by the transactions and transforma-tions of resources made possible by the existence of meso rules.Energy flow is unavoidable in all such economic operations. For muchof human history the energy used was largely food fuelled humanactivity and the burning of biomass. This did result in environmentaldegradation but not on the grand scale that we have witnessed in theera of fossil fuels. In the modern economy, economic operations caninvolve direct energetic processes (e.g. transformations such as

Table 1Four modes of entrepreneurial response to environmental problems/opportunities.

Class Mode Mechanism Example Incentive

Socio-cultural

Changedbeliefs,preferences,or values

Culturalimitation,signalling

New “green”lifestyles

Intrinsic,social signalling

Political New laws,or resourcetransfers

Law, force Carbon taxes Reputation,votes

Creative Scientificdiscoveries,inventions,philosophicalwritings, art

Science,education,idle curiosity,academicscholarship,the arts

The solar PV cell,Darwin's Origin ofthe Species,splitting the atom

Scientific orartisticreputation,selling patentsor copyrights

Economic New businessmodels,commodities orservices

Market,consumerchoice

Creatingcommerciallyviable large scalesolar powerstations

Profit, marketshare

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smelting metals) which use large amounts of fossil fuel energy withclear environmental effects. However, there are also economicoperations that are mainly concerned with the storing and manipula-tion of information. These tend to be electronic and use relatively lowlevels of energy but they can result in very significant increases in theefficiency of energy use in delivering both existing and new goods andservices. Correspondingly, innovations in such operations increasesignificantly our access and use of information about the environ-mental impacts of human activity.

This emergent capacity to use electronic energy to access a vastamount of information and computational power has opened up newkinds of entrepreneurial opportunities. Viable alternative energygeneration systems have been made possible, affordable technologiesto monitor environmental conditions have emerged and electroniccommunication systems have provided platforms for millions ofpeople to understand and discuss the environmental impacts ofeconomic activities. Two kinds of meso rules have been emerging:first there are technological and organisational ones that economicentrepreneurs adopt to create value from the production and sale ofenvironmental protection systems; second, there are meso rules thatare created by socio-cultural entrepreneurs and, when widelyadopted, influence political processes and related institutions. In ourco-evolutionary process, adopters of the latter meso rule are, in effect,representing the “interests” of both the natural environment and thewelfare of future generations. Economic evolution (M→M′) thusmoves the economic order up an energy gradient (E→E′). This isassociated with a higher throughput of energy that, as a vector of bothquantitative and qualitative change, is consistent with the first phaseof an environmental Kuznets curve. Environmental degradation maytake many possible forms, including pollutants or environmentalloading, loss of bio-diversity, loss of resilience, depletion of a resourcestock, or increases in population driving increased use. All of theseconstitute signals, either directly or indirectly, to possible entrepre-neurial agents that opportunities are coming into existence.

There are at least five ways this may arise. The first is via directobservation, as for example with observation of atmospheric pollutionor deforestation. A second way is theory-based observation. This relieson scientific concepts and measuring technologies, as for example,pesticides or the ozone hole. A third way goes via media and socialnetworks (Potts et al., 2008), as for example, global warming. A fourthway is viamarket operations due to: (1) supply changes, in which pricechanges signal changes in scarcity conditions; or (2) demand changeswhere preferences have endogenously changed (Earl and Potts,2004). A fifth mechanism is via expectations. These can be embodiedin prices in markets with a forward dimension, which is only possiblewhere there is an interaction of mental models at the “fourth order” ofcomplexity (Foster, 2005). Each of these mechanisms offers anopportunity for entrepreneurship to occur, whether it is socio-culturalentrepreneurship, promoting a new fashion, championing a cause,etc., creative entrepreneurship by scientists seeking to make discov-eries which may or may not have innovative potential, politicalentrepreneurship involved in the championing of new laws, economicentrepreneurship in devising profitable business models, or as acomplex entrepreneurial opportunity involving some or all of these.There is a considerable literature on entrepreneurial opportunitywhich presumes that opportunities are exogenous. Here we regardthem as endogenous in a similar way to Acs et al. (2009), but from adifferent analytical perspective, as discussed in the later part.

4. Entrepreneurial Response

Environmental loss, caused by prior economic evolution, thus,offers four classes of entrepreneurial opportunity: political; socio-cultural; creative; and economic, as in Table 1.

First, we may conceive of the lead response emerging in the formof social or cultural entrepreneurship in the form of corporate

leadership, celebrity leadership, or fashion leadership, or in generalthe process by which a local initiative has wider effect. The socio-cultural mechanism works via seeking to change beliefs, preferencesand behaviours via an imitation or social learning mechanism. Thiscreation and adoption of meso rules may be spontaneous, in the formof the emergence of cultural leadership and fashion, or it may be moresystematic and programmed via education and media mechanisms.This socio-cultural mechanism does not require a single generalsolution (i.e. a new law), but will issue from a diversity of behavioursthat are then subject to differential copying or replication over socialnetworks (Bentley et al., 2007). In this way, new models of thoughtand behaviour, as well as social organizations and institutions, mayemerge in response to environmental problems. The entrepreneurialresponse here refers to the agents that provide the institutional orcultural seeds, in the form of new models of thought, action ororganization that might subsequently be replicated by others.

Second, environmental problems present political opportunities tothe entrepreneurial politician or law-maker if a socio-culturalmeso ruleconcerning action to solve an environmental problem has been widelyadopted. Such political solutions (i.e. fiscal or regulatory response) areretailed by most political franchises. Such political entrepreneurshipcreates new conditions for ongoing economic evolution by changing theunderlying constraints and opportunity sets for value creation, thusproviding entrepreneurial feedback (via constitutional rules) from theenvironmental problem to new economic rules of the game. In theHayek/Schotter model, laws (as governing institutions) are the productof self-organization, the codifying of emergent patterns of actions. Yeteven from this perspective, wemay view laws as the product of politicalentrepreneurshipboth in proposingnew “rules of the game” or in leadingthe drive to their codification. Environmental problems are thusentrepreneurially resolved politically in the form of new laws, treaties,agreements, etc.

The third entrepreneurial mechanism concerns scientists, inven-tors, artists, philosophers and writers. All are part of processes thatyield physical, chemical (and now micro-biological), organisationaland aesthetic discoveries that can be used to devise new techniques,new combinations of components in machines, newmechanisms thatcan do work using energy, new organisational structures and newcombinations of aesthetic form. Because there is a significant “publicgood” dimension to creative entrepreneurship and a high level ofuncertainty involved, there is general governmental support forscience, education, training and the arts. Entrepreneurs in this spaceseek the status associated with scientific discovery, literary fame, etc.,and possibly, but not necessarily, enhanced income, or to register apatent or copyright in the hope that it might be purchased at some

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point to facilitate an innovation. For example, in relation to theformer, many climate scientists have been working on a voluntarybasis within the IPCC program and, with regard to the latter, theincreased concern over global warming has stimulated a great deal ofscientific activity in attempting to discover the photo-chemicalproperties of different combinations of organic molecules that mightunderpin the development of lower cost solar collecting technologies.

The fourth entrepreneurial mechanism concerns the economicagent engaged in seeking to create value by the discovery, originationand realization of new market opportunities created by newenvironmental problems. Such entrepreneurial ventures will seek toprovide new solutions, in the form of new goods or services, either asnew choices or product niches within existing market categories or asnew business models and technologies. For example, there isseemingly high and growing demand for “green consumption”(which in part of course derives from the effects of socio-culturaland political entrepreneurial actions; e.g. Keogh and Polonsky, 1998).Thus, there are profit incentives to develop new “green” goods andservices, a process presently working its way through much of theeconomy. Such profit incentives not only come from the provision ofgovernment subsidies but also from the economies of scale and scopethat can be enjoyed, as well as the advantages of gaining a dominantmarket share when entering a new niche rapidly.

It should be apparent that these four entrepreneurial mechanismshave to interact in order to have an effective action. There areexamples in history where this has occurred (Schaper, 2005) butthere are others where there was failure. The volume by Landes et al.(2010) contains a number of examples where there was a disconnectbetween these four mechanisms of entrepreneurial action by politicalinterest groups or defenders of cultural norms led to the negation ofentrepreneurial attempts to enact, and profit from, changes that couldhave averted crises and catastrophes.

5. Implications

This entrepreneur-centred co-evolutionary model has severalimplications for the analytic focus of ecological economics.

First, it implies that the value of a resource, and indeed the verynotion of what even “counts” as a resource, along with how it isdistributed and owned are less fixed from the entrepreneurial-evolutionary economic perspective. This is due to the entrepreneurialpossibility of changing the “rules of the game”, or effecting change inthe knowledge-base of the economy. As such, the co-evolutionaryperspective is sceptical of standard notions of exogenously imposedresource constraints (i.e. a known non-renewable stock of x, or of amaximum flow of environmental services of y), or of concepts ofsustainability that leave no role for new knowledge that is the result ofentrepreneurial experiment and innovation.

Secondly, expectations play a larger role in this model than inconventional models of economic–environmental dynamics becauseof the central role of entrepreneurial action in formulating responsesby creating new rules, solutions, business models, etc., in the face ofuncertainty (Lachmann, 1986). Here the perspective is starklydifferent to standard, neoclassical economics since all four of theentrepreneurial responses discussed occur in states of uncertaintywhere meso rule “understandings” have to emerge to enableinnovative experiments to occur and best practices to spread throughimitation, collaboration and selection (Earl and Wakeley, 2010). Theneoclassical perspective lays most stress upon economic responses toprice incentives where, for example, the increasing scarcity ofresources or costs imposed as negative externalities due to depletionof environmental services raise prices.

Now, there is little doubt that prices are important in signallingentrepreneurial opportunity (Kirzner, 1973), but, because of theuncertainty involved in innovative experimentation, considerableentrepreneurial failure always occurs. So there is muchmore involved

than simply the neoclassical response, which presumes eithercertainty or quantifiable risk. Only through the adoption of mesorules in the formation of beliefs, aspirations and common under-standings, will entrepreneurs respond to price incentives. Theentrepreneur does not just react to prices set by a market, s/he seeksto bring a new market into existence and to lead in such a market byforecasting how particular patterns of change play out with con-jectures of future relative prices or what expected patterns of relativedemands and scarcities might be. This kind of future-oriented,connection-establishing behaviour is an example of what Foster(2005) calls fourth order complexity and it has to exist before anyeconomic incentives can have a significant impact. Note also that, justas we can speak of different domains of expectations, we may alsospeak of different domains of uncertainty as corresponding to, forexample, technological, market, political, regulatory, cultural and evenecological circumstances. There is scope for entrepreneurial responseover each dimension of uncertainty and their interconnections.

A third observation is that entrepreneurial action is properlyunderstood as making conjectures about the value a new idea mightcreate, and then putting that into action in pursuit of some kind ofvalue. As we have noted, this is not necessarily a pecuniary profit, butmay include identity, social attention, power or favours, many ofwhich can be converted to material forms through subsequentexchanges. Profit-seeking is not the only class of strategic action inthe face of opportunities; the other of course is rent-seeking. Rent-seeking in economic–environmental co-evolutionary contexts islikely to be as prevalent as in any other domain of economic life. Itsmain effect operates via the formation of coalitions, both within andacross economic, cultural and political domains that act to lock-inparticular institutional rights or advantages or to exclude or makedifficult the adoption of new solutions to emergent problems. In otherwords, they operate by seeking to shut-down “positive” entrepre-neurial responses (whether cultural, creative, political or economic).Thus, the meso rules embodied in existing institutions that determinethe nature and extent of connections between economic andenvironmental systems need to be evaluated not only in terms ofstatic properties, such as allocative efficiency, fairness and so on, butalso in terms of their adaptive flexibility and openness to change.

Fourth, because economic activity is often mobile and responsive toboth relative prices and institutional regimes, this model opens newperspectives on globalization. Themain implication that follows from theentrepreneur-driven evolutionary model is that environmental degra-dation is a planetary problem, a process wemight think of as “globalizedecological degradation”. This also implies that our four entrepreneurialfeedbacks in the face of such degradation also have to be global in reach.In this regard it should be apparent that, in a Web 2.0, connected world,socio-cultural systems, by far, lead theway in theglobal context, and thushave a powerful competitive advantage over political entrepreneurship,which is much more effective at more local levels where political forcestend to have a greater impact. The vast integration of internationalproduction and trade, largely due to entrepreneurship, implies that thescope for global economic entrepreneurship to mitigate environmentaldegradation is significant. So global environmental treaties may benecessarily parasitic on, or symbiotic with, economic treaties. Forexample, these interconnections are very evident in the global debateconcerning global warming andwhat to do about it. What we observe isnot a logical discussion but a struggle between existing adopters of bothsocio-cultural, e.g., religious, and economic (e.g., a belief in maximaleconomic growth)meso rules versus adopters of an emergentmeso rulethat we must act to mitigate climate change. This is not a scientificdiscussionbut one involving the struggle betweenexisting andemergingmeso rules, driven by entrepreneurial behaviours.

Fifth, the co-evolutionary model points toward conceptualisingpolicy responses in terms of entrepreneur-led adaptation rather thanexpert-led optimization. In a co-evolutionary context there is no ideal oroptimal policy setting for the simple reason that the set of “old” meso

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rules, embodied in existing institutions, will be subject to ongoingchange and the nature of this is uncertain in a radical sense. This changecomes from continuous experimentation and learning, consolidated byentrepreneurial value creation as circumstances change. Just as there isno ultimately final most-winning competitive business strategy butrather a race without end, so too is there no ultimate optimalenvironmental policy but rather a continual process of ongoingexperimentation, learning and policy adaptation (Potts, 2009). Thekey role of government is not “picking winners” intervention but thecareful nurturing and formalization of facilitating meso rules and theprovision of an incentive structure in markets that signals toentrepreneurs the direction that their ventures should take. Generally,entrepreneurs will do a better job more quickly than governmentplanners. For example, in countries such as Spain and Germany, theprovision of feed-in tariffs has led to entrepreneurially driven innova-tions and reductions in unit costs in solar power generation thatgovernment could not have achieved through direct action. Market-based emissions trading schemes, coupled with appropriately reinfor-cing political and socio-cultural meso rules, promotes a diversity ofentrepreneurial experiments andbeneficial outcomes thatwould not beotherwise possible. This meso rule reinforcement is also importantbecause such policies are expensive and taxpayers will only tolerate arising cost burden if there is awell-establishedmeso rule thatmitigationof climate change is a very high priority.

Sixth, it is entirely reasonable to question the efficacy of entrepre-neurial responses in the market domain in relation to their specializa-tion and experience. Entrepreneurs in a market economy may be well-honed to take advantage of opportunities presented in solvingproblemsin the domains of consumer and producer goods and services, but theymay be less well-versed in dealing with environmental opportunities.Raising awareness of environmental problems and proposals for theirsolution begins with socio-cultural entrepreneurship and, if anassociated meso rule set is adopted widely, political entrepreneurswill begin to devise appropriate policy proposals. An immediate effect islikely to be increased public support for appropriate acts of creativeentrepreneurship but lack of experience is likely tomean that economicentrepreneurs will experience high failure rates. It is for this reason thatventure capitalists are often reluctant to finance entrepreneurial, highrisk projects and it is, therefore, essential that government is heavilyinvolved in providing appropriate support and facilitation to solvewhatis principally a public good problem. In instances where environmentalproblems have a high degree of visibility (e.g. urban smog), emotionalsalience (e.g. genetic modification), or low discount rates (e.g. climatechange) political entrepreneurship may well be highly effective in thisregard. But when problems are less visible or charismatic, such as withkrill stocks, or involving environmental problems that do not respectpolitical boundaries, then global socio-cultural entrepreneurship,Greenpeace style, may have a distinct competitive advantage.

6. Conclusion

We have sought to outline a co-evolutionary model of economicand environmental systems connected, both negatively and positive-ly, by entrepreneurial endeavour. In this model “economic-only”entrepreneurship and associated innovations tend to have negativeenvironmental and ecological effects. But these, in turn, create newentrepreneurial opportunities over several domains: political, cultur-al, creative and economic. These different entrepreneurial pathwayscan lead to new meso rule sets, embodied in new institutions, bothinformal and formal. However, in an interconnected economy–environment system we can expect new environmental problems toarise that then present new entrepreneurial opportunities, sobeginning the cycle again. Thus, we believe that it is necessary toadopt a co-evolutionary, non-equilibrium modelling approach inwhich the core processes are the application of both free energy andnew knowledge (Foster, 2010).

The schematic model that we have sketched here is preliminary.However, it provides a sound basis for further analytical and empiricaldevelopment. In dealingwith the behaviouralmechanisms that connecttwo open complex adaptive systems that evolve through a mix of self-organization and competitive selection, a newmethodology is required.Foster and Potts (2009) have proposed amix of historical, statistical andagent-based simulation and calibration that would seem to be a goodstartingpoint in studying the interaction betweeneconomic systemandenvironmental system co-evolution. We have argued here that this isnot only a resource interaction (á la Nicholas Georgescu-Roegen andKenneth Boulding, et al., and subsequently by John Gowdy and Jeroenvan den Bergh, et al.), but it also involves complex entrepreneurialfeedbacks, and it is this latter mechanism of co-evolution that, in ourview, properly defines the dynamic relation between evolutionary andecological economics.

Yet if we are correct about this mechanism, then this implies thatthe conceptions of sustainable economic growth and also ofenvironmentally-friendly economic policy are both widely miscon-strued. In both cases, entrepreneurship is the proximate cause ofmany ecological problems but the fact that it can also be their solutionhas been under-estimated. However, such solutions can never befinal, or in equilibrium, because solving one set of problems inevitablyintroduces a new set—this is a fundamental feature of a co-evolutionary interaction. If this is not understood by policymakers,serious errors can be made. We have also emphasised thatentrepreneurial responses play out over different and sometimescompeting domains: variously economic, political, creative and socio-cultural. That these can be either competing or synergetic domains isinsufficiently appreciated in models of economic and ecologicaldynamics, which commonly presume just “market failure” withuniquely political solutions such as environmental regulations, taxesor transfers. Yet when environmental crises are recognised asunintended consequences of past entrepreneurship, we may thenappreciate how further entrepreneurship may resolve these pro-blems. So there may well be no such thing as a definitive economicsolution to an environmental problem. Rather, environmentalproblems are better conceptualised as due to the continuous presencein human systems of entrepreneurial action to solve emergentproblems in innovative ways. For the entrepreneur, an environmentalproblem is just another problem that presents an opportunity for gain.However, entrepreneurship can only occur if there are a set offacilitating rules that allow the possibility of gain. In this sense, theenvironmental context is no different and environmental policyshould be oriented much more towards entrepreneurial facilitationthan it is at the present time.

Acknowledgements

This paper originates from a CSIRO workshop in Canberra in Juneof 2009 organized by Anna Straton on “applications of evolutionaryeconomics to the challenges of sustainable development”. The idea forthis model was jointly proposed by Potts and several participantsduring the course of the workshop, including Anthony Ryan and RyanMcAllister. This paper does not necessarily reflect the views of CSIRO.A version of this paper was also presented at the InternationalSchumpeter Society Conference in Aalborg, Denmark (21st–24th June2010). We are grateful for the very useful comments received. Thoseoffered by Peter Murmann were especially useful.

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