[ed. I'm glad to see this discussion. In my career, which included conservation policy, planning, litigation, and permitting, I and other collegues frequently wrestled with essentially the same problem: how do you attach a dollar value to healthy fish and populations, natural forests, clean water, functional wetlands, pristine beaches (or the loss thereof) when there are no suitable economic models to factor in all the various benefits that those resources provide (ie., something other than simple market metrics based on the economic value of activities like logging, mining, fishing or other commercial activities). Not to mention the cost of restoring those resources should they be lost. For example, what value should we place on a killer whale that's neither consumed nor used in any commercial context (other than whale watching)? Contingent valuation is one way, but it's still a rather broad and imprecise science, prone to high levels of subjectivity. What's needed is a methodology that adequately prices all service benefits, both directly and indirectly, not only to humans but the rest of the natural environment as a whole. The flip-side of this is, of course, that not all of the world is known, or knowable... which is why scientists still have a job. But, to the extent that some of those complexities can be identified and integrated, they should be.]
Gross Domestic Product is the market value of all goods and services produced within a country in a year. It is, today, the standard snapshot of a country’s economy. But does it deserve this position? After all, it focuses on economic activity while ignoring many of the consequences of that activity, economic or otherwise.
Cambridge economist Sir Partha Dasgupta has long argued for a broader measure of a country’s wealth, and has worked on some of the most difficult challenges involved: How do you assign a dollar value to a forest? To human capital? How do humans understand long-term planning, and the effects of their actions on fellow citizens?
What should economists be most concerned with measuring?
Ultimately we social scientists should be concerned with human wellbeing, the quality of lives people lead. That sounds very metaphysical or perhaps repugnant to the hard-nosed social scientist, a policy maker. But at the end of the day that’s what it’s all about, otherwise we should just call it a halt, call our enterprise a halt. The question is not how to measure human wellbeing, because that’s an impossible thing, but whether you can find some metric which more or less approximately corresponds to it. So two things can move in the same way, even though they are not the same thing. The metric which best, and it can be proved to be so, mimics movements of human wellbeing, no matter how you define human wellbeing, is the measure of wealth. Wealth was originally a word used to define wellbeing, but that’s not how I want to use it. The result I’m quoting, the metric that you were asking for, is a value of all the assets an economy has inherited from the past. And the assets include not just buildings, machinery, roads, and equipment, the stuff that we typically think of as being capital goods, but also our health and education, which now economists all agree consist of asset, which we call the human capital. But a third category, and that’s the one we are discussing here at the Pontifical Academy, is natural capital, nature, which comes in abundance and in various forms and sizes.
Let me give you an example of why wealth, which is the value of these assets, could be going down even when GDP goes up. Imagine now, just to take a simple example, suppose you convert a huge swathe of wetlands and construct shopping malls, just as an illustration. Now, in national accounting, from which you can estimate GDP, the shopping mall will be an investment; the amount that you’ve spent will be counted as investment. But the fact that you have lost the wetlands, the republic property out there, will not be costed, it will not be seen as a depreciation of your assets, because the wetland is lost and the wetland was supplying lots and lots of services, birds and bees, and water. There’s a huge amount of services that a wetland does and I needn’t innumerate that here. But that loss will not be counted against the project.
How can economics calculate the value of nature itself?
What are the sounding blocks? The mineral subsoil resources, they are not too bad, that can be done and that has been done. We have very few estimates of stocks of fisheries, for example, so never mind valuation, governments don’t even estimate what’s out there in terms of stocks. So it’s crazy. It’s like a household. Somebody comes and says what do you own? And they won’t know whether they have pots and pans in their kitchen, they won’t know how many beds they have, they won’t know if they own the house, or perhaps have forgotten a cottage.
So national accounts are disgraceful because national governments aren’t encouraged to actually have a, if you like, an inventory of what people have at their disposal, one person or the other. Fisheries, for example—for most countries you will not be able to get estimates of the stocks of fisheries, inland fisheries or coastal fisheries. Then there is all this factory out there, forests, wetlands, mangroves, they are churning out stuff, churning out services which you’re using either in extractive form or just using as invisible inputs into production. Do we have an inventory of that? Very little. But it’s not impossible these days, because you have satellite imaging. But remember, look at the number, you have forest covering acreage or hectares or millions of hectares, but it’s not going to give you very much about the composition of forest. You might say it’s deciduous or tropical, but what’s in there, the species in there which is churning out all that stuff, most of it is not in the national accounts, not even in the most crude approximate form. So we have been able to use the timber value of forest in constructing wealth measuring using market prices, but we have not been able to devise methods to estimate the services forest provide in, say, preventing floods, all the other services that we know nature offers. So they’re all missing. So it’s very, very early days now and I don’t apologize for that. If I have to apologize, I should apologize on behalf of my profession for not having done this 30 years ago or 40 years ago, but we haven’t and we’ve started. I like to think 20, 30 years from now we’ll be in a much better position to talk about the wealth of nations.
Let me give you a simple example. It’s not a complete answer to the problem, but suppose the forest recedes from the village center because there’s over-extraction. Then to heat your home, to cook food, you have to walk a longer distance to collect firewood. Now you could as a first cut estimate the time cost, energy cost of walking, say two kilometers, three kilometers to pull back a few kilograms of firewood. So you could try and start valuing things that way.
Is the free market to blame for not assigning value to the environment? (...)
The problem as I see it is that in no society that I can think of is there an absence—and in most societies there is an awful lot of it—of unaccounted for consequences for others of the actions that we each take. When we do some damage to nature and we’re not charged for it, that’s an unaccounted consequence for others, future generations and so forth. So we have a collective action problem, that’s what it really amounts to, and that collection active problem will not disappear anytime soon; it will never disappear. And the origins of market fundamentalism, if you want an intellectual basis for it, was that there will not be any unaccounted for consequences because everything will be priced, so you’ll pay for every consequence of your action. But, of course, market fundamentalists don’t remember that theorem, so they apply it to a world in which all hell breaks loose in terms of what we call externalities, and we still say, well, the market still works. So we have a serious problem of understanding the conceptual basis for a social philosophy.
Gross Domestic Product is the market value of all goods and services produced within a country in a year. It is, today, the standard snapshot of a country’s economy. But does it deserve this position? After all, it focuses on economic activity while ignoring many of the consequences of that activity, economic or otherwise.
Cambridge economist Sir Partha Dasgupta has long argued for a broader measure of a country’s wealth, and has worked on some of the most difficult challenges involved: How do you assign a dollar value to a forest? To human capital? How do humans understand long-term planning, and the effects of their actions on fellow citizens?What should economists be most concerned with measuring?
Ultimately we social scientists should be concerned with human wellbeing, the quality of lives people lead. That sounds very metaphysical or perhaps repugnant to the hard-nosed social scientist, a policy maker. But at the end of the day that’s what it’s all about, otherwise we should just call it a halt, call our enterprise a halt. The question is not how to measure human wellbeing, because that’s an impossible thing, but whether you can find some metric which more or less approximately corresponds to it. So two things can move in the same way, even though they are not the same thing. The metric which best, and it can be proved to be so, mimics movements of human wellbeing, no matter how you define human wellbeing, is the measure of wealth. Wealth was originally a word used to define wellbeing, but that’s not how I want to use it. The result I’m quoting, the metric that you were asking for, is a value of all the assets an economy has inherited from the past. And the assets include not just buildings, machinery, roads, and equipment, the stuff that we typically think of as being capital goods, but also our health and education, which now economists all agree consist of asset, which we call the human capital. But a third category, and that’s the one we are discussing here at the Pontifical Academy, is natural capital, nature, which comes in abundance and in various forms and sizes.
Let me give you an example of why wealth, which is the value of these assets, could be going down even when GDP goes up. Imagine now, just to take a simple example, suppose you convert a huge swathe of wetlands and construct shopping malls, just as an illustration. Now, in national accounting, from which you can estimate GDP, the shopping mall will be an investment; the amount that you’ve spent will be counted as investment. But the fact that you have lost the wetlands, the republic property out there, will not be costed, it will not be seen as a depreciation of your assets, because the wetland is lost and the wetland was supplying lots and lots of services, birds and bees, and water. There’s a huge amount of services that a wetland does and I needn’t innumerate that here. But that loss will not be counted against the project.
How can economics calculate the value of nature itself?
What are the sounding blocks? The mineral subsoil resources, they are not too bad, that can be done and that has been done. We have very few estimates of stocks of fisheries, for example, so never mind valuation, governments don’t even estimate what’s out there in terms of stocks. So it’s crazy. It’s like a household. Somebody comes and says what do you own? And they won’t know whether they have pots and pans in their kitchen, they won’t know how many beds they have, they won’t know if they own the house, or perhaps have forgotten a cottage.
So national accounts are disgraceful because national governments aren’t encouraged to actually have a, if you like, an inventory of what people have at their disposal, one person or the other. Fisheries, for example—for most countries you will not be able to get estimates of the stocks of fisheries, inland fisheries or coastal fisheries. Then there is all this factory out there, forests, wetlands, mangroves, they are churning out stuff, churning out services which you’re using either in extractive form or just using as invisible inputs into production. Do we have an inventory of that? Very little. But it’s not impossible these days, because you have satellite imaging. But remember, look at the number, you have forest covering acreage or hectares or millions of hectares, but it’s not going to give you very much about the composition of forest. You might say it’s deciduous or tropical, but what’s in there, the species in there which is churning out all that stuff, most of it is not in the national accounts, not even in the most crude approximate form. So we have been able to use the timber value of forest in constructing wealth measuring using market prices, but we have not been able to devise methods to estimate the services forest provide in, say, preventing floods, all the other services that we know nature offers. So they’re all missing. So it’s very, very early days now and I don’t apologize for that. If I have to apologize, I should apologize on behalf of my profession for not having done this 30 years ago or 40 years ago, but we haven’t and we’ve started. I like to think 20, 30 years from now we’ll be in a much better position to talk about the wealth of nations.
Let me give you a simple example. It’s not a complete answer to the problem, but suppose the forest recedes from the village center because there’s over-extraction. Then to heat your home, to cook food, you have to walk a longer distance to collect firewood. Now you could as a first cut estimate the time cost, energy cost of walking, say two kilometers, three kilometers to pull back a few kilograms of firewood. So you could try and start valuing things that way.
Is the free market to blame for not assigning value to the environment? (...)
The problem as I see it is that in no society that I can think of is there an absence—and in most societies there is an awful lot of it—of unaccounted for consequences for others of the actions that we each take. When we do some damage to nature and we’re not charged for it, that’s an unaccounted consequence for others, future generations and so forth. So we have a collective action problem, that’s what it really amounts to, and that collection active problem will not disappear anytime soon; it will never disappear. And the origins of market fundamentalism, if you want an intellectual basis for it, was that there will not be any unaccounted for consequences because everything will be priced, so you’ll pay for every consequence of your action. But, of course, market fundamentalists don’t remember that theorem, so they apply it to a world in which all hell breaks loose in terms of what we call externalities, and we still say, well, the market still works. So we have a serious problem of understanding the conceptual basis for a social philosophy.
