Axel and Sophie Steenbergs Blog: News, Views and Chat about Spices, Tea, Recipes and the Environment

I have recently read Tim Jackson’s “Prosperity Without Growth – Economics for a Finite Planet“.  It proposes that we refocus how we manage our economies to take into account the limits on the earth, but is rather vague exactly how we should do this – relying on less consumerism, more community-based activities and public ownership, but without answering the central question of how and who pays for all of these things.  He accepts that some of these things are already available and people are involved in community activities, but that they are small parts of society, yet he then brushes over the fact that these are currently a minority precisely because most people do not want to work in their allotment or do yoga.  This core structural issue is at the heart of the problem and is the hardest part to change – we are taxed so we must work, so there is insufficient time available to do many of those fulfilling things in life, so we must consume to make up for the time we do not have and chose a few hobbies for the little spare time we have to keep us sane, yet more public ownership and livelihoods simply increases the tax requirement etc etc.  However, what the book does usefully do is focus on the question itself, i.e. how to have sustainability and continue with a market economy and addresses the concerns posed by the classic book of Meadows et al of “The Limits To Growth”  from the 1970s in a new millennial context, without actually adding much to the basic concept that the earth has limits and while we are still within these boundaries today at some point not very far in the future growth in population and resource use because of economic growth will bring these constraints into play, which arguably is the same problem raised by Thomas Malthus in 1798.  Tim Jackson essentially says we must reduce economic growth, accepting that this runs counter to the way the economic discourse is built.  So what is the issue with sustainability and economics?

Sustainability is a key concern in the 21^st century.  The Brundtland definition of sustainability is “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (WCED, 1987).  This can be further clarified as the concept that “the current generation does not have the right to consume or damage the environment or the planet in a way that gives its successor worse life chances that itself enjoyed” (House of Lords, 1999).  However, while the understanding of the environment has increased in the last 100 years, mainstream economics as used by policymakers remains based on ideas developed by Jeremy Bentham towards the end of the 18^th century, as expanded by John Stuart Mill in the 19^th century.  This raises the issue of whether economic analysis needs to change better to address sustainability in environmental policy response.

Mainstream economic analysis is based on utilitarianism.  This assumes that individuals are rational economic actors whose primary purpose is the self-interested pursuit of happiness, or utility, and that the best route to this end is through the purchase of those goods and services they want at rationally negotiated market prices.  Therefore, when considering welfare, policymakers should arguably consider the aggregate effect of these transactions in an economy, together with the market prices paid, and that their policies should ensure “the provision of the greatest happiness for the greatest number” (Bentham, 1789).  Furthermore, while acknowledging that some individuals may suffer or not reap the benefits of the market economy, “it is the price we pay for progress and the general good” (Galbraith, 1987).

The principal measurement used to inform policy is Gross Domestic Product (“GDP”), which is the value of the goods and services flowing through an economy over a period of time.  As consumption provides utility, GDP is a proxy for the aggregate happiness of individuals within an economy and Government policy should, therefore, provide the conditions for growth in GDP/capita.  Other economic methods that follow include cost-benefit analysis and discounting, both of which are used to evaluate the financial impacts of specific projects or policy areas.  However, as discussed below, the goal of sustainability in environmental policy is not adequately addressed by these economic tools.

While it is assumed that the more income consumers earn the more they can purchase in the market, so increasing their happiness, evidence by Richard Easterlin found that increases in happiness become slight or negligible beyond middle income levels (Easterlin, 1972 and 2001), while Gregg Easterbrook found that even though people’s objective well-being was increasing they continued to feel life was getting worse so their subjective well-being would stay unchanged or even fall.  Similarly, Amartya Sen focuses on the capabilities and freedoms of individuals to live the life they chose as being important to well-being (Sen, 1993, 1998 and 1999).  Therefore, what matters is what people are able to achieve or do, rather than the products or services that they consume, so learning at school or university is not a matter of utility but of what people may become from having studied even as governments seek to make it into a commercial contract through Student Loans or similar financial systems.  Economic development, therefore, occurs when there are more opportunities open for people to do things they value, rather than when GDP/capita or individual income has grown.  Whereas, unsustainability occurs when individuals become less capable of doing things over time, for example health deteriorates because of air pollution or toxic waste, or the opportunity to farm is reduced due to salinization of the soil or water shortages, or freedoms are curtailed, for example when decisions are made today that preclude choices being made by successor generations, such as decisions made in this generation that affect the environment over 100,000s if not millions of years, for example nuclear power and related nuclear waste dumps like that at Gorleben in Germany.  People will, also, do things for no financial reason, for example vote in elections, tend the plants in a public space or look after someone else’s children, so we are not solely economic beings even if politicians and sociologists wish to cast us as such; in fact I would argue we are human beings first and economic animals second, third or fourth.  So a economy focussing on the capability to flourish is better than one focussed on our ability to consume, i.e. a world according to Sen is better than one based on Bentham.

Traditional measures for well-being have targeted GDP growth.  However, GDP measures material throughput in an economy and does not provide useful information on sustainability.  For example, GDP is the aggregate of monetary transactions in a country, so it excludes bartering, free and unrecorded cash services such as voluntary work for charities, or domestic activities like cooking and housecleaning.  Furthermore, it is an income and expenditure statement rather than a balance sheet, so does not account for changes in the resources of a nation, whether these are physical like forestry and mineral reserves or intangible like education, health and landscape.  Finally, GDP is a snapshot in time of the activity of an economy in totality, so neither provides information about the future nor the equitable distribution of transactions through a society now or in the future.  Understanding the distribution of wealth in economies is important as poverty can be a driver for environmental degradation, and so sustainability.

Mainstream economic analysis, including GDP, does not properly consider the impact of livelihoods on the environment.  The activities of humans through work and consumption cause changes to the environment, which can be encapsulated in the impact equation: I = P x R x T, which is a rehash of Paul Ehrlich’s impact equation.  This summarises environmental impact (I) as resulting from the scale of resource use (R) consumed by a population (P) through using particular technologies (T).  Mainstream economics treats these impacts, or disutilities, as externalities or market failures either to be ignored or to be borne equally by the whole population and environment, because they do not have direct monetary values that are easily measured.  For example, packaging in the UK is transferred from manufacturer to individuals, then to the wider population and environment when it is sent to landfill, shifting the original environmental cost from the manufacturer to the environment, which must bear the sustainability burden, and the taxpayer, who finances the costs.  However, economics dominates political discourse, because money is power and power is money, so these externalities must be monetised and internalized into economic analysis before they can inform policymaking and bring sustainability onto the political agenda.

Finally, the most complex aspect of sustainability is time and how to evaluate future costs today.  Economists utilise financial models to provide policymakers with analyses of forecasted budget scenarios, so enabling assessments to be made of the impacts of “green” standards and taxes on the economy and the cost-benefit of specific political responses.  However, this sophistication hides the fact that forecasts are based on the past, with its uncertainties, discounted back by the relevant rate of time preference. Therefore, forecasting sometimes becomes a discussion over discount rates.  However, discounting creates an issue, being that the greater the risks and uncertainties involved the higher the discount rate, so the lower the current value of future costs.  This approach is, therefore, neither equitable nor appropriate for sustainability where the well-being of future generations should be considered equally to our own.  The societal discount rate for sustainability should tend towards zero (Anand & Sen, 2000) to prevent policymakers devaluing future uncertain, but large, impacts compared to current known, but smaller, environmental problems.

These analytical problems are highlighted in the Stern report on the economics of climate change.  Climate change occurs over the long-term and contains significant uncertainties in how it might operate over this time period in terms of scale, location and timing.  Arguably, it may impact future generations more than the current one, although as successors will have greater wealth and knowledge, they ought to be better able to finance and develop technology to ameliorate any disbenefits.  These issues create problems for policymakers regarding the equitable distribution of uncertain economic costs over generations and across future global populations, i.e. sustainability in terms of costs, capabilities and freedoms over time.  Stern used an utilitarian approach that focused on “the maximisation of the sum across individuals of social utilities of consumption”, cost-benefit analysis and GDP forecasts run over 200 years discounted back at 1.4%ⁱ (Stern, 2006b).  Critics of the report advocate rates of around 3-5½% (Dietz, 2008; Dasgupta, 2006; Nordhaus, 2007; Tol, 2006).  Under Stern, estimates of the costs of climate change were of losing “at least 5% of global GDP each year, now and forever” (Stern, 2006a), but by using the alternative rates the impact falls to 1.4-2.5%ⁱ.  Effectively, it becomes an ethical judgement over the value of equity between generations, or sustainability – discount rates close to zero place relatively higher values on future generations, while higher rates place lower values on successors.  Or to be brutal, it uses sophistication to hide the fact that the report hinges on the gut feeling of economists and politicians over what values to place on the financial numbers, as influenced by all the baggage of individual presumptions and political leanings in making these big leaps of faith.  I have no issue with making assumptions and running complex models, but the complexity of the modelling should not be used to hide that the report is but a finger in the air, albeit a very clever one!

Therefore, economic analysis needs to change to address these problems and so better inform policymakers about sustainability.  Here are some quick thoughts on ways that these issues can be addressed.

Firstly, policymakers need to consider a broader range of statistics beyond a narrow focus on GDP.  These indicators should include both financial and non-financial data and cover tangible and intangible assets and externalities of an economy, environmental quality and the well-being of the population.  For example, assets may include values for agricultural land, mineral reserves and woodland, together with estimates for education and health.  Sustainability indicators and externalities may comprise data on biodiversity, greenhouse gas emissions, soil fertility, air and water quality, and waste to landfill.  Well-being could comprise both objective and subjective measurements of well-being, targeting capabilities and freedoms as well as happiness.

In the UK, many of these are already compiled, for example net domestic product (GDP less depreciation) and greenhouse gas emissions, while a new well-being index will include environmental and sustainability measures from 2012.  For example, there is the Happiness Index, which shows the UK’s happiness declined by -10.7% from 1961 – 2005 and that of Australia grew by 21.3% over the same period, or the Human Development Index as developed by Haq and Sen, which currently ranks Australia top and the UK 22nd.  Although these statistics may be measured, sustainability perhaps needs to become central to policymaking.  For example, biodiversity indicators currently have warnings against breeding birds and plant diversity, yet these changes are not driving meaningful policy response (Defra, 2011).  The issue may be that there are too many measurements being compiled versus the relative clarity of GDP, therefore they could be reduced to a smaller number of indicators, for example ecological footprint provides a clear, measureable link between economic activity and environmental burden.  In addition, policymakers should include targets and responses for use when these limits are breached, for example greenhouse gas emissions’ targets are clear and measureable and so policy responses can be proportionate.

However, I fear that sustainability and the environment just do not rank up there against education, health and crime, for example.  This is perhaps because the questions are just too complex and the answers too difficult or wishy-washy for politicians to contemplate, so there is a need for politicians to focus on policy areas that can be addressed within the relatively short term of a political election cycle and are simple enough to be communicable to the media and electorate – a sort of knowledge elitism that goes along the lines of “that’s all a bit too difficult for you, the masses out there, just leave and trust us the politicians and our cronies to sort it out, because we know the best…there, there” with a gentle pat on the head.

Secondly, policymakers must address future uncertainties.  Utilitarianism is reductive and, using projections with suitable discount rates, provides clear choices for policymakers.  However, the environment is entangled and has many unintended consequences, so forecasts based on the past can result in incorrect predictions.  These complexities and uncertainties can cause relatively poor forecasting especially of sudden changes to environmental systems.  For example, policymakers neither predicted the collapse in the Canadian cod fisheries in 1991-1994 (NAFO, 2009) nor the credit crisis that began in 2007, both of which have resulted in significant economic and environmental changes.  No scientist predicted the BP oil disaster in the Gulf of Mexico in 2010, or the Japanese tsunami of 2011 with its devastating human, environmental and economic consequences.  Or to abuse a quote from Harold Macmillan “Events, my dear boy, events” are what make rigid policies tricky.  Therefore, economic analysis should include the effects of high impact, low probability events on sustainability and consider using a precautionary approach to prepare for such eventualities, and even if the responses and policies of those in power does not go down those low probability routes, they should build in sufficient flex into our systems to be able to adjust to new information and haul back systems from potential collapse if and when needed.  We must be wary of committing to routes that are completely fixed in stone, forever, because in a Pythonesque way “noone expects the unexpected”.  Hence, even Rory McIlroy in his amazing golf at the Congressional in the 2011 US Open hit his second shot on the 18th in round two into the lake to give him his first dropped shots and a double bogey – you just never really know what might happen.  In fact, the answer to this issue for economics may be to look at ecosystems themselves and apply understandings of environmental knowledge to financial systems.  This is an approach that Andrew Haldane, the Bank of England Director For Financial Stability, is looking at with Robert May.  They are suggesting that complex systems can be more fragile than simple ones, i.e. the Amazonian rainforest is more prone to collapse than the African savannah or a big multidisciplinary bank is more likely to collapse than, say, a small mortgage and savings focused building society. 

Thirdly, economic analysis should focus on systems and processes rather than financial outcomes.  It is difficult, if not meaningless, to place monetary values on non-instrumental things such as a beautiful landscape or a glorious sunset, or as one of the Pevensey residents said “You can’t put nature on the stockmarket” (Burgess, 1998).  This creates a problem as to get sustainability into the economic discourse and so onto the political agenda, you must monetise it, but this reduces sustainability to choices based on financial values and cost-benefit analyses while excluding non-instrumental values.  An alternative approach is to focus on the systems within economies and how economic processes impact, or are affected by, the environment rather than on the financial outcomes.  For example, these interrelationships between the environment and the economy form the basis for the concepts of the commons and ecological footprints, both of which offer alternative economic models to utilitarianism. So while the original work on the tragedy of the commons by Garrett Hardin was depressing, work by Elinor Ostrom has shown how a decentralised system can manage the commons effectively, together with proposing a framework for how this collective approach can be applied to sustainability in social-environmental systems (Ostrom, 2009).  Therefore, economists could focus on how to provide individuals and communities with the capabilities and freedoms to understand how changes to the environment occur, as well as the tools and powers to respond to change collectively without Government intervention and without pursuing individual, rational goals that may be negative for the common good over the longer term, i.e. selflessness over selfishness.

I see this individualistic, decentralised approach as key to the future.  However, I worry that sustainability, ecological modernisation and the environment will be all used as excuses (or justification) for greater Government and “expert” meddling in peoples’ private and business lives whether through regulation or taxation.

In conclusion, mainstream economic analysis focuses on the maximisation of utility in a population through managing GDP over time.  However, a narrow focus on GDP does not properly address sustainability, because it focuses on consumption within an economy rather than good and bad changes to its asset base, it externalizes the environmental and societal costs of economic activity and it fails to consider the capabilities and freedoms of citizens now or in the future.  Changes are needed to include indicators of changes to intangible and tangible assets, the external costs of human activities and the well-being of individuals or even happiness.  Furthermore, a less monetary approach should be adopted that analyses the processes and systems within economies and how economies, societies and environments interact and can respond to changes in real-time and over longer timescales.

References

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Bentham, J. (1789) An Introduction to the Principles of Morals and Legislation, Mineola NY, Dover Publications (reprinted)

Burgess, J., Clark, J., and Harrison, C. M. (1998) Respondents’ evaluations of a CV survey: a case study based on an economic valutaion of The Wildlife Enhancement Scheme, Pevensey Levels in East Sussex, Area, 1998; 30.1, 19-27

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