Part 9 (1/2)

As Partha Dasgupta wrote: ”we economists see nature, e see it at all, as a backdrop from which resources and services can be drawn in isolation Macroecono for nature, if it coht to the real business of 'doing economics' We economists have been so successful in this enterprise, that if sorowth!,' no one needs to ask, 'Growth in what?' - we all know they ross domestic product (GDP)”24 The GDP is equal to the total aoods and services produced within a country (A final good such as a bicycle oods such as tires that are not included separately) Bees, fish, or oil do not count unless they are part of some econo up pollution is

While the GDP is often used as a proxy for standard of living by overnments, it is actually a measure only of economic activity If you believe in efficientutility, and so on, then that makes sense Governments also like it because it correlates with tax revenue However, because it ignores the negative effects of growth, GDP gives aimpression of an economy's state of health A number of alternative measures have therefore been developed in recent years, which typically address both environmental and social factors

A leader in this area was the tiny Buddhist kingdom of Bhutan, which in 1972 replaced GDP with Gross National Happiness This combines a number of econole number Perhaps as a result, the environ to Nature: ”The country has soressive - and controversial - environs, ti and even tobacco sales”25 They also control touriset a hotel and personal guide

Another measure is the Index of Sustainable Econoical economists Clifford W Cobb and John B Cobb, Jr in 1989 This corrects the GDP for factors such as uncounted household services, so it's the same if you clean the house yourself or pay a cleaner; and subtracts for effects such as environradation and resource depletion In Aenerally tracked the GDP until the 1980s, but since that tiative factors have outweighed the positive econoress Indicator, which includes additional factors such as social inequality and criain seen a slow decline in the past few decades, even as GDP has soared In my home province of Alberta, Canada, a 2005 study by the Pembina Institute revealed that, despite a 500 per cent increase in GDP since 1961, boosted in large part by oil sands development, the GPI shrank by 20 per cent in the same time The study noted that, on the plus side, ”premature mortality and infant mortality has declined, life expectancy has increased, there are fewer fatal car accidents, unees are up” On the downside, ”household debt is on the rise, the gap between the rich and the poor is growing, as are greenhouse gas ereat and, I believe, privileged place to live, but the study shows that being a boos problems

The Happy Planet Index is defined by the New Economics Foundation in the UK as life satisfaction, ical footprint27 It therefore offers a kind of efficiency measure, in terms of happy years per unit of planetary area Gerh on this index as the US, because people in both countries have similar scores of life satisfaction and life expectancy, but Germans consume resources at about half the rate Nine of the top ten countries are in Latin As

In 2009, a commission appointed by Nicolas Sarkozy, the French president, recoeneral well-being, educational standards, non-market activities such as childcare and leisure, and environmental sustainability The report also noted that, while France's GDP per person in 2005 was 73 per cent of America's, French people also work shorter hours and fewer days, and get better govern28 Working less is also usually easier on the environht spots frolobal carbon eest annual fall in 40 years, according to the International Energy Agency29 How to balance these different factors and cole indicator is obviously a difficult and auous task, and the result is more like a report card, with a nurade, than a hard econoreat appeal of the GDP is that it makes no such attempt - any transaction is the same as any other As Herorean analogy” between ”fuzzy” reality and ”well-defined, analytic nunobel laurel leaves have been sprinkled on risk formulae, based on the nor The Gaussian copula used to valueIn exactly the sa the underlying complexity, it leads to the same kind of miscalculation

If the alternative uous, and multidimensional, that's because the real world is too In fact, one could argue that metrics of any type are over-used in our nuet-driven society Metrics can take on a life of their own, as they becoovernment or corporate manipulation; and as with risk models, over-reliance on them can weaken our intuition and coe of corain of salt, and realise that each captures only a part of the full story

The living econoical economics” should be a little redundant, as both words share the Greek root oikos (household) and togetherlike household-study household-law It is telling that the two fields of ecology and rown so far apart in the century and a half since they were named that they now represent completely different sets of principles

The basic idea of ecological econoument with the World Bank economists: when you draw the box for the econoer box called the environment The human economy is a subset of the world system Our inputs, in ter pollution, are like the anis the sa systems, such as a cell, or a beehive, or a co a closed system, like a machine, the economy is open to the environment Attention therefore shi+fts fro-picture questions related to things like scale and ti relative to its environ resources at too fast a rate? Is it adequately disposing of its oaste? Is it endangering the food chain on which it depends for survival?

One application of ecological economics is to estimate the value of ”services” provided by nature For exaical Economics estimated that the ide economic value of insect pollination services, provided mostly by bees, was 217 billion, which is about 95 per cent of the total value of the world agricultural food production Soht yawn, but the report also showed that in terms of value, the crops most vulnerable to a loss in pollinators are the stimulants, coffee and cocoa Lose those bees, and the whole hu to slon a notch as ander around with glazed eyes, searching for the last re Starbucks stores31 In 2006, the Stern Review on the Econoical econo into account the ienerations32 An inherent problen econos that cannot be directly ht be reasonable for sohts of future generations only by ht want, what alternatives they e is impossible to predict, because as discussed in Chapter 1, our models of the atmosphere aren't much more reliable than our models of the econoets, andbetter or worse

A different approach, sometimes known as environmental economics, is to let the market make the decision, or infer price from consumers' choices As a resource becoly; if we care about future generations, or endangered species, then ill take that into account edecisions This is just uise As one textbook on environmental economics states, in a perfect market, ”prices ration resources to those that value the by Adam Smith's invisible hand to achieve what is best for society as a collective Optie lead to optiuht Markets can cost everything, including future risk But if e contract, with its billion-page docu like the CO2 bond we hold with our billions of descendants

Ecology vs economics

The different assuical and mainstream economics mean that the two come up with very different policy reco with iously in favour of econo every politician around the world could agree on after the credit crisis was that growth needed to be restored; less often was it ue that the best way to protect the environ the economy - as if a healthy planet is a luxury that only the rich can afford35 Yet there is now arowth is often associated with a decline in environment-sensitive indicators such as GPI Quality ical econoe relative to the natural systerowth can outweigh any benefits The world is already stretched to capacity to feed the current human population We can increase production by improved efficiency, but there is always the trade-off between efficiency and robustness - intensive ile and requires large aricultural system exhibits the same lack ofsystem (Chapter 2), but it is even oes: if you want to collect honey, don't kick over the hive

Mainstream econo that can grow and expand without any constraints Ecological economists see this as an illusion, and believe that money should be tied more closely to real physical wealth Under fractional-reserve banking, banks can lend out far more money than they hold as reserves The result is a debt-based financial system in which most of the ” around frantically trying to pay it off The situation is exacerbated by the existence of coe tower ofuneasily on top of the world's oil supply in 2008 was an i that could vanish as easily as it was created (though its effects on huest obstacles to a sustainable, controlled-growth econoet out of debt in order to afford it Ecological econoue that we should reduce the amount of credit in the econo, in which the only money that can be lent out is backed by deposits36 Mainstream economists treat the planet's resources and pollution sinks as if they were essentially infinite, but according to esti beyond our ical footprint of the human race - as measured in terms of the amount of resources we need to support ourselves sustainably - is now equivalent to 13 planets37 The extra 03 planets-worth of resources is being borrowed froical footprint as the United States, the total would be equivalent to ten planets We are building up a large and unsustainable debt of a different kind that far outweighs anything produced by the subpri market

The healthy economy

To reduce this debt, a first step is to make both resource use and pollution reflect their real environy One approach is to shi+ft the tax burden froh use of a carbon tax This will not only y sources y-intensive itehout the entire econooods, for exa and transportation will be pushed to adopt energy-saving technologies

Another approach is to put a floor price in rich countries on non-renewable energy sources such as coal or oil, equivalent to the price of the nearest renewable substitute One schee Soros for the US, would be to ih a carbon tax or auctions of pollution permits, and use import duties to keep domestic prices above a certain level This would help spur the develop down their cost For this to be politically acceptable, the expected income from the plan would have to be distributed to the public in advance38 While price signals will steer the economy towards a more sustainable path, they don't directly address the problem of resource depletion As with fisheries, sometimes the only way to protect the resource is to put a hard limit on the extraction rate Under a cap-and-trade systehts to extraction are auctioned off to cohts to bandwidth are auctioned off to mobile phone companies39 Such schemes violate the neoclassical principle that we shouldn'twith the energy , oil producers keep their product in the ground, waiting for it to appreciate further in value OPEC countries get together to set their own quotas Large consu China subsidise oil prices in their home markets Venezuela uses oil as a tool to proh Chavez's anti-American rhetoric is somewhat undercut by the fact that his country's econo them with oil)40 Institutional invest on the astrological position of the moon and stars, or on whatever Goldman Sachs tells the in our world econorowth and the threat of cli towards low But the way that we handle it is less sophisticated than the ine If ant to avoid a Minsky Moovernor onto the world energy markets

Finally, we need to make the economy as a whole more robust to environmental shocks, even if this is at the cost of traditionally-defined efficiency In previous chapters, I argued that in order to understand things like systemic risk, we need to adopt a systems approach to the finance systeists in areas such as ecosyste to University of Washi+ngton fisheries professor Robert Francis and colleagues, include: ”Keep a perspective that is holistic, risk-averse and adaptive,” and ”Maintain resilient ecosystems that are able to withstand occasional shocks”41 Similar principles could apply quite well to the huriculture and retail are built around lobe These are highly efficient, in a narrow economic sense, and benefit froional self-reliance, and fragility One benefit of a carbon tax is that it would reater diversity of local supply chains, therefore reducing systemic risk

The main problem with the economy, after all, is not that it is hard to predict or is expanding insufficiently quickly, but that in many respects it appears to be in a state of ill-health As Galen wrote in On Medical Experience (2nd century AD): ”In those who are healthythe body does not alter even from extreme causes; but in [the unhealthy] even the se” The extreme instability seen in the markets, the extreme inequalities in wealth, even the extree, are all signs that the system is out of balance Econo of a crisis like the oil shock, anyof a heart attack, but they can at least etting better or worse (Of course, one reason why doctors are less willing than economists to make unsound predictions is because they can be sued forus to picture and sies within the econoy, the predictive power of such models is usually low, because of the complexity and intractability of the system As Evelyn Fox Keller noted, nature ”is not coos” The main use of models is to elucidate basic principles; consider different future scenarios; and perhaps even make the system less stressed and unpredictable in the first place

Our current approach to the econoulated systeically unstable;techniques that assume stability; try to make predictions of the future; and then react in surprise when soe that the system is unstable, that opens up the opportunity to actively iuess its next rowth is necessary in order for the economy to avoid collapse The whole point of capitalisenerate innovative products and services that increase productivity, raise standards of living, and pay off the debt Consumers, for their part, are in a constant search for novelty and exciteuarantees that only the productive will be rewarded and prosper44 A loth econo debt, inefficiency, and ement, in which the benefits of increased productivity are sequestered by the elite, as the le to survive, and the planet co stress, doesn't look very stable either It will look even less stable if the world population reaches 9 billion people, as it is projected to do by 2050

We therefore need to re-orient our definition of groay froically useful technologies and policies such as low-carbon housing and transportation We also need to rethink our approach towards consueneral Neoclassical ideology, and our faith that unchecked ate our path to the future, are probably the biggest i the environical perspective er pretend that opti run free, or by naively assus like econorowth, the truth is a lot more complicated In fact, as shown in the next chapter, we may already have overpaid

CHAPTER 9

THE UNHAPPY ECONOMY

One should never direct people towards happiness, because happiness too is an idol of the market-place One should direct them towards mutual affection

Aleksandr Solzhenitsyn, in Cancer Ward (1968)