Economists should no longer treat the natural world as separate from human activity: indeed, we must embed our reliance on nature into economics. But that doesn’t mean tearing up the rulebook: protecting the environment requires turning the discipline’s tools to new tasks.
The way that economists and policy-makers think about the world is shifting. As the climate and ecological crises continue to unfold, it is becoming increasingly clear that our everyday actions have large and direct negative effects on our surroundings.
Carbon emissions from our flights, farms and factories affect the air we breathe. The forests we raze for fuel, agriculture and to build homes, offices and schools leave the earth’s atmosphere starved of oxygen. And as more and more fish are hauled from our seas, the water in which they once swam is becoming less hospitable to life.
Figure 1: Forest area by country (% change in square km, base year = 1990)
Source: World Bank
According to data from the World Bank, many countries have depleted a vast share of their forests since 1990. Figure 1 highlights how Brazil has cut down around 15% of its trees, Indonesia 24% and Paraguay over a third.
Similarly, data from the International Union for Conservation of Nature (IUCN) show that there are almost 3,000 species of fish now classified as critically endangered. Nearly 2,500 amphibians are also on the red list, facing extinction, as are around 2,000 insects (see Figure 2).
Figure 2: Endangered species (number of species on red list)
Source: IUCN Summary Statistics
But how did we get here? How has the economic development of the last century come at so great a cost? These questions, as well as how best to react to the emergency at hand, were the subject of a discussion between Diane Coyle (University of Cambridge and one of the Observatory’s lead editors) and Partha Dasgupta (University of Cambridge and author of the Dasgupta Review, an independent report commissioned by the UK Treasury).
The conversation, held on the first day of this year’s Royal Economic Society (RES) annual conference, centred on both why and how we must embed our reliance on nature into economics. Diane and Partha also explored how traditional economic measures (such as GDP growth) are insufficient to capture this relationship, and discussed what needs to change about economics as a discipline to address these collective problems.
What are the main messages of the Dasgupta Review?
At the core of the review is the idea of ‘embeddedness’. For Partha, it is no longer sufficient for economists to view nature as something separate from human activity. To understand and model our use of natural resources with precision, it is vital that economists see human beings – as well as our accumulation of physical and human capital – as contained within nature.
Measurement is also an important issue. Until economists and policy-makers are able to find accurate ways to track the effects of economic activity on the natural world, it will be very difficult to price anything accurately. How will we ever know the true costs or benefits of a given investment without having a clear picture of the way that such an investment alters or shapes the natural environment around it?
For example, if developers in Sri Lanka want to build a shrimp farm on the coast, any economic benefits in terms of jobs, trade and profits must be weighed against the destruction of the immediate area around the farm. To build the facility, mangroves will need to be removed and an area of open water contained. Not only will this take away a natural filter for the region’s seawater, but it will also reduce the availability of nursery space for native fish, birds and insects to breed and lay their eggs.
As a result, to gain a complete picture of the economic costs and benefits of such a project, it is important to understand the complex network of relationships between the sea, wildlife and plants. Analysing projects simply by looking at human factors, such as income and profit, overlooks numerous other issues, giving a murky and incomplete picture of potential economic or social gains.
How should economists change the way they think?
For both Diane and Partha, embedding nature into economics is not about tearing up the rulebook. Correctly accounting for the value of the natural world does not mean doing away with economic orthodoxy.
As Partha put it during the conversation, as economists ‘we have inherited a language created by some of the most extraordinary minds of the past century… but we are misusing it.’ Embedding nature into economics is about a methodological re-orientation, not a revolution.
In fact, traditional economic thinking can help to clarify our understanding of the climate and ecological crises, if well deployed. Using a framework of scarcity of resources, for example, shows that as natural capital is depleted, its relative price increases. This means that the true cost of any activities that further reduce the stock of natural capital is set to grow continually. According to the same analysis, this implies a ‘negative discount rate’ – our forests, seas and marshlands become more and more valuable to future generations.
So, rather than viewing economics as a discipline at odds with protecting the environment, its tools should be turned to new tasks. The valuable lessons of asset management, discounting and resource optimisation – when combined with granular data informed by ecology and biology – can allow policy-makers to take a holistic view that captures the economic, social and environmental costs and benefits of different interventions. To view these decisions with maximum clarity requires using the methods already at our disposal, not rejecting the knowledge accrued over the last few decades entirely.
Towards the end of the discussion, Diane questioned the level at which governments will need to intervene to embed nature into economics. How much should be left to firms and households? Can individuals be trusted to do the right thing and protect the natural world? In a situation with missing markets and externalities (such as pollution), normally it is thought to be the role of the state to ‘correct’ the problem with policy.
To this, Partha concluded by claiming there is no ‘one-size-fits-all’ framework to follow. Different groups have different ways of managing their local environments, and we cannot assume that the ecological and climate crises will play out in a uniform manner.
Where appropriate, decision-making should be ceded to local communities who understand the challenges they face. Community is as important as technology, governance and monetary incentives when it comes to creating sustainable systems that cause minimum harm.
Social capital, therefore, is the final piece of the puzzle. Networks of people – from the local level all the way up to multinational organisations – are vital if nature is to be embedded successfully into economics.
These community bonds stretch to future generations too. As Partha reflects in the review, ‘if we care about our common future and the common future of our descendants, we should all in part be naturalists’. To care for each other, therefore, is to care for the natural world – there can be no economy without it.
Where can I find out more?
- The Economics of Biodiversity: The Dasgupta Review: The full report for HM Treasury is available online, together with an abridged version and a summary of headline messages.
- This article on the University of Cambridge website summarises and reflects on some of the review’s main findings.
- This interview with Leslie Hook for the Financial Times provides more of Partha Dasgupta’s reflections on the review.
- The second edition of our printed magazine – ECO – focuses on the economics of the climate crisis and is available to read online.
Who are experts on this question?
- Matthew Agarwala
- Diane Coyle
- Partha Dasgupta
- Cameron Hepburn
- Cristina Peñasco
- Dimitri Zenghelis