Sane Economics After Obama

Between now and Obama’s departure, progressive economists, environmentalists and political radicals need to get their act together.

There are many books and papers that provide the basis for developing a shared understanding of why today’s dominant free-market paradigm is lethally inadequate in the face of the challenges we face in the coming decades.

Nature’s role in sustaining economic development by Partha Dasgupta is a useful summary of  the kind of economic thinking we will need to use if we – and Gaia – are to come through the 21st century in reasonable shape.

The full paper is available for free download from the Royal Society and I warmly recommend it. As the Guardian says, this lucid and authoritative work shows how

“In nearly all their earlier calculations and prescriptions, economists have taken the earth for granted.”

Professor Dasgupta ranges widely in his argument, covering the importance of natural capital in issues such as de-forestation, PES ( Payment for Ecologicial Services),  social well-being,, property rights, and comprehensive wealth.

Just a few quotes give the flavour:

… most economists would appear to be convinced that scientific and technological advances, the accumulation of reproducible capital (machinery, equipments, buildings and roads), growth in human capital (health, education and skills) and improvements in the economy’s institutions (which are also capital assets) can overcome diminutions in natural capital.

Otherwise, it is hard to explain why twentieth-century economics has been so detached from the environmental sciences. Judging by the profession’s writings, we economists see nature, when we see it at all, as a backdrop from which resources and services can be drawn in isolation.

A lack of property rights to natural capital

Why do not market prices reflect nature’s scarcity value? If natural capital really is becoming scarcer, would not their prices have risen, signalling that all is not well?

The problem is that if prices are to reveal social scarcities, markets must function well. For many types of natural capital, though, most especially ecological resources, markets not only do not function well, often they do not even exist. In some cases, they do not exist because relevant economic interactions take place over large distances, making the costs of negotiation too high (e.g. the effects of upland deforestation on downstream farming and fishing activities; §4); in other cases, they do not exist because the interactions are separated by large temporal distances (e.g. the effect of carbon emission on climate in the distant future, in a world where forward markets do not exist because future generations are not present today to negotiate with us). Then there are cases (the atmosphere, aquifers, the open seas) where the migratory nature of the resource keeps markets from existing—they are called ‘open-access resources’, and they experience the tragedy of the commons.

Whenever economists have probed the matter, they have found that all economies subsidize large numbers of economic transactions with nature. Some of those transactions are large  (construction of large dams that alter ecosystems), but mostly they are small. How do those subsidies affect overall economic performance? More fundamentally, how should economic  performance be measured?

Most methods that are currently deployed to estimate the shadow prices of  ecosystem services are crude, but deploying them is a lot better than doing nothing to value them.

Professor Dasgupta ends his paper by saying that the overarching moral that emerges from (the admittedly rough and ready data) is salutary:

Development policies that ignore our reliance on natural capital are seriously harmful—they do not pass the mildest test for equity among contemporaries, nor among people separated by time and uncertain contingencies.

Its not going to be easy to take all this into account in preparing for when Obama cashes in, but now’s the time to start to develop the profound multi-disciplinary understanding out of which comes the confidence to act in the way  that the hugely-complex challenges require.

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3 Comments »

  1. 1

    I’m glad to see that Partha Dasgupta has finally come around to this view of how nature is the basis for our economy . The TEEB program of the Green Economy Initiative , launched by UNEP,UNDP and ILO in Geneva ,Dec 2008 , which I was invited to keynote( see http://www.EthicalMarkets.tv ) and headed by Pavan Sukhdev is conitinuing its work of imputing this contribution of nature in money terms. But we must go deeper, and also recognize the unpaid, “Love Economy” as I have termed it in my own books since the 1970s ( see http://www.HazelHenderson.com ). Unpaid voluntary work , in every society contributes some 50% of all production and services , and much more in traditional societies. But this caring, sharing and cooperation is ignored by economists as “un-economic”. This is why I have bee crusading to correct both corporate balance sheets and GDP national accounts to include all these factors which are still dismissed in most economic textbooks as ” externalities” ( see http://www.beyond-gdp.eu) and many papers on our homepage at http://www.EthicalMarkets.com

  2. 2
    wilfwilliamson Says:

    Yes, Hazel, we can only hope that this paper is a sign of an accelerating shift after so little has really changed for so long .

  3. 3
    philip Says:

    There is no scarcity of good ideas to humanize and make economic analysis more ecologically responsible, this article being one instance of that. The problem is western capitalist economists are oriented toward the short term bottom line at any cost, by training and inclination, and they have little interest in looking beyond that. So until capitalism is radically tamed, or better replaced, we should not expect progressive economic theory to be given a serious hearing by the capitalist camp. But there’s no harm in having these theories refined, developed and ready to implement when the time is right. A prerequisite to this is a crippled or disappeared capitalism


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