The causes of the environmental crisis may be hugely complex, but the most effective way to deal with it in economic terms seems rather obvious. We must use our best scientific understanding of how environmental problems can be resolved as the basis for implementing scientifically viable economic policies and solutions. If this could be accomplished within the framework of the economic theory that we now use to coordinate economic activities in the global market system—neoclassical economics—there would be no cause for concern. But as this discussion will demonstrate, there is a large problem here that should be cause for great concern: Neoclassical economic theory is predicated on unscientific assumptions that massively frustrate or effectively undermine efforts to implement scientifically viable economic policies and solutions.

These assumptions were first articulated by 18th-century moral philosophers (Adam Smith, Thomas Malthus and David Ricardo) who embraced a new understanding of God known as deism that resulted from attempts to understand the metaphysical implications of Newtonian physics. Because this physics assumes that the laws of gravity completely determine the future state of physical systems, the deists concluded that the universe does not require, or even permit, active intervention by God after the first moment of creation. They then imaged God as a clock maker and the universe as a clockwork regulated and maintained after its creation by physical laws. (1)

Smith, Malthus and Ricardo believed that the clock maker created a second set of laws to govern the workings of the clockwork—the natural laws of economics. Smith imaged the collective action of the forces associated with these laws as an "invisible hand," and this construct became the central legitimating principle in mainstream economic theory. Smith claimed that the invisible hand is analogous to the invisible force that causes a pendulum to oscillate around its center and move toward equilibrium or a liquid to flow between connecting chambers and find its own level. Given that Smith's invisible hand has no physical content and is an emblem for something postulated but completely unproved and unknown, why did he believe that it actually exists? The answer is that Smith was a deist and his belief in the existence of the invisible hand was an article of faith.

The Origins of Neoclassical Economic Theory
In economics textbooks, the 19th-century creators of the economic theory now used by mainstream economists (Stanley Jevons, Leon Walras, Maria Edgeworth and Vilfredo Pareto) are credited with transforming the study of economics into a rigorously mathematical scientific discipline. There are, however, no mentions in these textbooks, or in all but a few books on the history of economic thought, of a rather salient fact: The progenitors of neoclassical economics, all of whom were trained as engineers, developed their theories by substituting economic variables derived from classical economics for physical variables in the equations of a soon-to-be outmoded mid–19th century theory in physics. (2)

The physics that the economists used as the template for their theories was developed from the 1840s to the 1860s. During this period, physicists responded to the inability of Newtonian mechanics to account for the phenomena of heat, light and electricity with a profusion of hypotheses about matter and forces. In 1847 Hermann-Ludwig Ferdinand von Helmholtz, one of the best known and most widely respected physicists at this time, posited the existence of a field of energy that could unify these phenomena. This proposal served as a catalyst for a movement called "energetics" in which physicists attempted to explain very diverse physical phenomena in terms of a vaguely defined protean field of energy that fills all space.

The strategy used by the creators of neoclassical economics was as simple as it was absurd—the economists copied the physics equations and changed the names of the variables. In the resulting mathematical formalism, utility becomes synonymous with the amorphous field of energy described in the equations taken from the physics, and the sum of utility and expenditure, like the sum of potential and kinetic energy in the physical equations, is conserved. Forces associated with the field of utility (or, in physics, energy) allegedly determine prices, and spatial coordinates correspond with quantities of goods. Because the physical system described in the equations of the theory in physics is closed, the economists were obliged to assume that the market system described in their theory is also closed. And because the sum of energy in the equations that describe the physical system is conserved, the economists were also obliged to assume that the sum of utility in a market system is also conserved.

In the mathematical formalism that resulted from these substitutions, economic actors allegedly operate within a field of force identified, in both figurative and literal terms, with energy. The natural laws of economics are assumed to operate within this field and to legislate over the decisions made by the economic actors. Because utility–energy in this mathematical formalism is conserved, the creators of neoclassical economic theory concluded that production and consumption are physically neutral processes that do not alter the sum of utility. And this conclusion became the basis for the claim that capital circulates in a closed loop from production and consumption and that the value of any good, commodity or service can only be determined by decisions made by economic actors. The creators of neoclassical economic theory also failed to realize or chose to ignore the fact that market systems are not closed and the conservation principle is quite meaningless in any real economic process. Nevertheless, these assumptions are now used to legitimate the existence of the invisible hand in its current form in the neoclassical economic paradigm—constrained maximization in general equilibrium theory.

Several well-known mid–19th century scientists told the economists that there was no basis for substituting economic variables for physical variables in the equations of the theory in physics. But the economists did not appreciate how devastating this criticism was and proceeded to claim that they had transformed the study of economics into a scientific discipline comparable to physics. In what is surely one of the strangest chapters in the history of Western thought, the origins of neoclassical economics were forgotten, the claim that neoclassical economic theory is scientific was almost universally accepted, and subsequent generations of economists disguised the existence of the unscientific axiomatic assumptions in this theory under an increasingly complex maze of mathematical formalism.

This misalliance between economic thought and a 19th-century physical theory explains why the neoclassical economic paradigm is predicated on the following unscientific assumptions:

• Market systems exist in a domain of reality separate and distinct from other domains.
• Capital circulates in these systems in a closed circular flow between production and consumption with no inlets or outlets.
• The lawful dynamics of closed-market systems legislate over the behavior of economic actors, and the actors obey fixed decision-making rules.
• The dynamics that operate within closed market systems, if they are not interfered with by the external or exogenous agencies such as government, will necessarily result in the growth and expansion of these systems.
• Market forces will resolve environmental problems via price mechanisms, along with more efficient technologies and production processes.
• The resources of nature are largely inexhaustible, and those that are not can be replaced by other resources or by technologies that minimize the use of the exhaustible resources or rely on other resources.
• The environmental costs of economic activities can only be determined by pricing mechanisms that operate within closed market systems.
• There are no biological or physical limits to the growth and expansion of market systems.