This is part of a series, ‘Economists Exchange’, featuring conversations between top FT commentators and leading economists about the coronavirus economic recovery
Sir Partha Dasgupta’s review into the economics of biodiversity, published earlier this year, did not shy away from controversy. “Collectively . . . we have failed to manage our global portfolio of assets sustainably,” he argued. “While humanity has prospered immensely in recent decades, the ways in which we have achieved such prosperity . . . have come at a devastating cost to nature.”
Dasgupta, who is emeritus professor of economics at Cambridge university, has focused his criticisms on how traditional economic models ignore “nature” as an asset, and neglected the depreciating effect of human activity on the biosphere. The review, conducted for the UK Treasury, suggests these omissions will endanger the prosperity of future generations.
Overlooking the impacts of human progress on nature seems to be rooted in a failure to move on from the drivers of the postwar economic era. In the late 1940s and 1950s, achieving reconstruction in Europe and alleviating endemic poverty across Africa, Asia and Latin America encouraged a focus on capital assets such as roads, buildings and ports, and human capital such as health and education. The result, according to Dasgupta, is that treasuries, banks and international institutions have come to believe humans can “bypass nature” in their economic lives.
As world leaders prepared to meet in Glasgow for the COP26 climate summit, the FT’s environment correspondent Leslie Hook interviewed Dasgupta to discuss the treatment of “natural capital” in economic modelling. He expressed scepticism about gross domestic product as a measure of economic success, and introduced the idea of “impact inequality” — the gap between the population’s demands and the biosphere’s abilities to meet that demand sustainably.
These problems, as he argues, are not insurmountable, but require a different way of thinking which accounts for the impact of humans on their natural environment.
Leslie Hook: How do traditional economic models value nature?
Partha Dasgupta: In a piecemeal way, nature does get valued. In ecological economics, which is now 40 or 50 years old, the attempt has been to value different types of natural capital. It could be a beach, it could be a park, natural entities which don’t have market prices. Techniques have been devised for teasing out people’s willingness to pay for making use of them, visiting them and so forth. That’s one way.
Another more recent procedure is to estimate the productivity of natural capital, natural assets, ecosystems, wetlands, coral reefs, mangrove forests, for the services they provide people.
Say in the case of mangrove forests, the productivity would be in terms of the fisheries they support and the protection they afford neighbouring villages from storms, and the wood they supply.
But, it’s all been done piecemeal and by that I mean nature hasn’t yet entered economic modelling in an essential way. It’s always been an add-on. If you study any of the models that treasuries, central banks or international organisations such as the World Bank use, none of the macroeconomic forecasts of the future have ever built a model of the human economy as embedded in nature.
Macroeconomic forecasting is misguided because nature is absent from the models on which forecasts are made. The “evidence-based policies” that emanate from them are therefore misguided: the evidence is misleading when the model on which it is gathered is spurious.
LH: One thing that the review says is that nature is a blind spot in economics, which you’ve alluded to in what you said just now. What would you like to see changed to address that blind spot?
PD: I think the change really needs to come internally from the teaching profession. It’s not a giant intellectual step to introduce nature into economics. Economic reasoning involves capital assets which are used to produce goods and services we like and enjoy and care about or need.
The hard work lies in modelling ecosystems and embedding the human economy in the biosphere. To introduce a further category of capital assets, “natural capital”, in economic models is not a big conceptual move.
But received economics does not include natural capital because economists are unfamiliar with ecology. Many of the most prominent economists today have a math background, and most have no knowledge of ecology. And yet mathematical models of ecosystems bear a strong resemblance to models of economic systems, so it should be relatively easy for economics courses to include natural capital.
To rebuild economics, we would need to add natural capital to the binary classification we economists use, namely produced capital, such as roads, buildings, machines, and equipment, and human capital, such as health and education.
Of course, many people would want to expand on that limited view of the value of nature and add the intrinsic value of ecosystems, perhaps even their value as sacred objects.
The value of natural entities such as mangroves, wetlands, and coral reefs are, as a first approximation, the contribution they make to human health and the production of other goods and services.
What makes natural capital intriguing to the economist is that these entities rarely come with prices attached to them, they don’t appear in the marketplace. As I said, special techniques are deployed for valuing them.
The Treasury should require economic models to introduce natural capital in a seamless way. There are plenty of able economists at the Treasury who can start doing that, in collaboration with academic economists and ecologists. It’s not a serious intellectual problem.
LH: One of the findings of the review is that the stock of natural capital per person declined by nearly 40 per cent between 1992 and 2014, and I just wanted to ask a bit about that number. How do you calculate a number like that? What’s the significance of such a big decline?
PD: First of all, these estimates are inevitably very, very crude because we are still at the early stages of including natural capital in economic calculations. The idea is to estimate that part of the wealth of nations which is embodied in natural capital, and then track it over time. This is how we arrived at the 40 per cent decline.
The estimate is crude because unlike time series of per capita GDP, valuing natural capital is a new exercise. Think of the years of work done by talented people in developing estimates of such macroeconomic variables as GDP and employment. They have been refined continuously. But you have asked for the significance of the big decline in natural capital per capita over the years. The significance is that modern economic growth has been built on the accumulation of produced capital and human capital: the same study found that per capita produced capital globally doubled in 1992-2014 and that per capita human capital globally increased by about 20 per cent.
The figures tell me that we have enjoyed economic growth in the postwar era by accumulating produced capital and human capital while simultaneously decumulating natural capital. We have mined and overharvested nature for our benefit. The pay cheque will come in due course, unless we are able to reverse the trend, because the floor on which the human economy is built will cave in.
Valuing ecosystems is hard work, but it can be done. Consider for example a mangrove forest. It offers at least three services: as a protection against storms, as a habitat for fish, and as a source of timber. The value of each on an annual basis can be estimated. Economists have compared the damages storms inflict on coastal villages protected by mangroves with the damage on villages which do not enjoy such protection. That gives us a lead on how to value that service.
It is somewhat easier to value the mangrove as a spawning ground for fish because fish are marketed. The same is the case with timber. The social value of a mangrove forest would be the present value of its services over time. If the mangrove forest is being degraded, the services it provides will deteriorate, so the value of the asset will become lower and lower. That’s what depreciation amounts to.
Depreciation is not accounted for in GDP. The “g” in GDP stands for “gross”, not net. No one would know from national statistics that natural capital is being degraded even as GDP is growing. That’s a serious shortcoming of GDP, for ecosystems can be degraded very easily and violently; you can wipe out a whole ecosystem by trashing it.
So, the reason the review proposes that national accountants move to create wealth accounts is another way of saying it favours taking stock of capital assets, of a nation’s capital assets or a community’s capital assets. Sustainable development should mean development along which wealth increases. After all, what we bequeath to our children are capital assets, that’s what are transferred from generation to generation.
LH: I’d like to ask what your thoughts are on GDP as a measurement. You’ve mentioned just now some of the ways in which GDP itself doesn’t account for natural capital. Do you think that GDP growth as a policy goal is effective or is that something that needs to be revisited?
PD: It doesn’t need to be revisited. It should be junked. GDP is extremely important. That’s not being disputed. For short-run macroeconomic policymaking, GDP is extremely good because it’s a measure of economic activity.
The objection to GDP is over the long-run. An economy can, over time, have increasing GDP, increasing consumption, increasing employment percentage, but it could be that you’re actually eating into the capital base: not the produced capital base, not the human capital base but the natural capital base.
The global economy is doing that, for example, with climate change because one of the assets is the atmosphere as a sink for our pollutants. It offers a service. It can recycle that pollutant. The pollution today is carbon emission, and that emission exceeds the ability of the biosphere to recycle it, without undergoing any stress.
We have been pursuing a development path in which natural capital has been declining. That’s a dangerous thing. Now we have to do a balancing act among the various types of assets, but without the larger exercise of estimating inclusive wealth, you wouldn’t know that there is a balancing act to be done.
LH: One of the terms in your review is “impact inequality”, which is defined as the imbalance between human needs or demands and nature’s supply of goods or the rate of supply. Tell me a bit more about this metric.
I’d also like to ask, in addressing this imbalance, do we need to address supply and demand at the same time or just focus on reducing human demands? Does the solution have to tackle both at the same time, or is it just one or the other that’s part of the answer?
PD: One of the three types of capital assets we’ve been talking about is natural capital, and that’s been degraded over the decades. Impact inequality speaks to that and offers a way to measure its rate of degradation.
Impact inequality is a snapshot at a moment in time of the demands humanity is making of the biosphere’s supply of goods and services, and comparing it to the ability of the biosphere to meet that supply on a sustainable basis. The difference between demand and supply is the impact inequality.
The qualification “on a sustainable basis” is extremely important because if the demand exceeds the supply, the biosphere can only meet that supply by deteriorating itself.
If, as has been the case in recent decades, demand exceeds the supply, what should be done? Well, we should try and reduce demand and increase supply. In other words, increase the biosphere’s ability to supply goods and services. One way to do that would be to invest in nature. Plant trees, for example. Allow nature to recover from assaults that we have been making on it, and offer it assistance to regenerate. There are nature-based solutions for regenerating the vitality of ecosystems such as wetlands or coastal fisheries, including removing waste, cleaning up rubbish and plastics.
On the demand side, there would be several factors. Population size is one, per capita standard of living is another and the third is the efficiency with which we use nature’s services and transform them into final products.
That efficiency is another parameter we can influence and, in the case of climate change, we found a good way to do that which is clean energy, moving away from fossil fuels. You’re not increasing the burden on the atmosphere as a sink of your emissions because your emissions have been reduced.
LH: A few minutes ago you were talking about how the earth is absorbing carbon, and that’s one of the services that nature is providing but we’re obviously producing more carbon than can be absorbed. If we evolve our economic thinking in the way you describe, would that help solve climate change, as well?
PD: Absolutely. Climate regulation, and I don’t mean government regulation, I’m talking about the way nature regulates our climate, is one of the many services that nature provides.
Another one is decomposing waste. We don’t think about it but it is happening all the time. Without it we would be completely sunk. All the leaves that fall on the ground in autumn, what happens to them? They get degraded and recycled into compost and become part of the soil. Who is doing that? Huge numbers of bacteria and also little insects. So, that’s another service.
Pollination is a third service. Nitrogen fixation is yet another, because plants can’t take nitrogen directly from the atmosphere by themselves.
Where the review beats up on mainstream climate economics is in regarding the climate system as separate from the rest of nature’s doings. That’s been one great defect of the climate literature: it concentrated attention on climate alone, not recognising that climate is part of a whole bunch of services that are interrelated.
LH: For the solutions, I think there are three buckets that you talk about. One is demand and supply or that our demands don’t exceed supply, and we’ve spoken about the other, which is changing our measures of economic success. The third one that you mention is transforming our institutions and systems.
What type of institutional change is needed? Beyond education, what sort of concrete actions could institutions take to start addressing these issues and to start including the value of nature in the way they operate?
PD: Here is a very good example of an institutional reform which is hugely needed. We have the open oceans over which so much of traffic takes place, goods which are shipped. Think of all these containers that are charging up and down in stately fashion across the Atlantic, Pacific, Indian Ocean and so forth. We’re looking at trillions of dollars of goods being transported. Is anybody paying rent for the use of the oceans? Nobody is because the oceans are free. It’s a free good. Nobody owns it. There are no markets for the permission to travel across it.
What should we do about it? The natural thing would be for us to create an institution which can charge rents for it and the revenue would belong to humanity as a whole because it’s not any country’s property, [the seas] are an open access resource.
Of course, any such charge is going to hit GDP, and that’s where the objection is going to come up. But you have to swallow some bitter pills because you’re basically trashing the oceans, and all the refuse that’s dumped into the ocean should be paid for.
We are talking about polluters’ payment systems. If you pollute, you should be charged, either through a tax, or by paying whoever is suffering from the damage. That’s the reverse of payment for ecosystem services — that you pay the owner of an asset which is offering the services you are enjoying. For instance, a farmer might be paid to grow hedgerows because that’s likely to enhance biodiversity.
We have another range of global public goods in the form of the tropical rainforest: the Amazon, Congo Basin and then in Indonesia and Malaysia. They’ve been transformed into square miles of palm oil plantations which have reduced biodiversity enormously.
The problem is that they are within national jurisdiction, so you can’t do anything about it. We all moan, we say how horrible the Brazilian president is because they’re removing [an area] the size of Portugal every year from the Amazon rainforest but we can’t do anything about it.
And the Brazilian president can say, it’s all very well for you to complain, but we have to develop. It’s our country.
Well, the natural thing would be to negotiate. How much would it take for you to divert your attention away from deforestation to other ways of managing your economy? How much would you need from us? That’s called payment for ecosystem services.
We are doing that at the national level, but not the international level. Now, that could cost billions, but it could be financed from the revenue the global community can get from the open oceans.
Crude calculations suggest it can be easily done, but we don’t yet have any notion of an international institution to do that, although we have the World Bank for supplying public goods like reconstruction and development.
We have the IMF, an international institution that is supplying a global public good, which is financial stability. So, if previous generations could do that, why can’t we do this now?
The above transcript has been edited for brevity and clarity