Editorial

Economics and Ecology

Our arbitrary property divisions don't extend to nature, and pollution ignores the property line.

By Ryan McGreal
Published January 09, 2006

Economics has come to dominate how people evaluate public activities. The Hamilton Chamber of Commerce believes Hamilton's "number one priority" is "to retain existing and attract new business opportunities to the City." (Brian Wilson, "Response to the Establishment of a Hamilton Triple Bottom Line Business Attraction Task Force", Hamilton Chamber of Commerce, Nov. 28, 2005)

An important priority, to be sure, but number one?

In the current federal election cycle, all the national parties are trying desperately to present themselves as responsible, by which they mean fiscally responsible. The Liberals point to their track record of economic growth; the Conservatives promise to cut taxes; the NDP have brought in a Bay Street investment banker and are committed to balanced budgets.

But when we look at the world through the prism of economics, we miss a lot. Economics deals in profits and costs, incentives and disincentives that influence human behaviour.

Pricing is the mechanism that allows us to evaluate economic activities in relation to each other. However, many of the consequences of market transactions are not reflected in the price, which means we cannot evaluate them at all using economics.

These latter considerations are called externalities, effects of a market transaction that are not reflected in the price. For example, if Peter sprays a pesticide on his lawn, it doesn't stay there. It spreads to other lawns, into the bodies of local wildlife, pets, and human residents (chiefly children, who spend more time in direct contact with the ground), and into the water supply.

If Jane's child acquires a neurological disorder as a result of exposure, that's an externality. The price Peter pays for his pesticide does not cover the cost of the child's medical care (not to mention Jane's anguish or the child's lost quality of life and future contributions).

Housekeeping

Economics is a study of how humans allocate and use natural resources to construct our civilizations. The word "economics" comes from the Greek roots oikos and nomos - literally, 'management of the house'. In economic housekeeping, externalities are the debris we sweep under the rug.

With its focus on human behaviour, economics ignores the systems that produce natural resources and absorb our leftovers and waste materials. This goes back to John Locke, who invented the modern notion of property: take a piece of the world, draw a legal line around it, and confer certain rights to the person who takes possession of it.

In economic housekeeping, externalities are the debris we sweep under the rug.

Economics tells us the world can be parcelled off, and indeed must be parcelled off for commerce to take place. However, our arbitrary property divisions don't extend to nature. The pesticide Peter sprays on his lawn ignores the property line.

Ecology is the study of the larger systems within which our economic activities take place. The word "ecology" literally means 'the word of the house', the governing principles that underlie living systems, of which human systems are only a part.

Ecology encompasses economics, since all economic activity is bounded by what the world's ecological systems can produce and absorb. It takes ecology to discover how Peter's pesticides can injure Jane's child.

Internalization

Some economists try to account for the non-economic effects of market activities by building those effects into pricing mechanisms. They are trying to internalize those externalities on the notion that more comprehensive pricing will discourage investors from pursuing environmentally damaging activities.

Unfortunately, it still puts the cart ahead of the horse, by making price the prime consideration of whether to do something. If an undertaking is profitable enough, investors can still pay to exploit it.

Stepping outside economics, we might conclude that some activities should never be undertaken, no matter how profitable. We may recognize intrinsic values that cannot be bought at any price. In an economist's professional opinion, however, this position seems absurd and indefensible.

Economists make decisions using cost/benefit analysis: how much will it cost, and how much will I benefit? If the benefit is greater, then the cost is justified.

To take an extreme example, the infamous ID numbers tattooed onto the forearms of Holocaust survivors are IDs from an IBM Hollerith system, a precursor to modern computer databases. IBM profited from helping the Nazis to set up their database of death, which they used to identify, track, and process the victims of the Holocaust.

In the 1970s, after Ford engineers discovered a design flaw in the Pinto that made it susceptible to fuel tank ruptures, analysts calculated how much it would cost to pay out death benefits to victims, compared with making the minor changes necessary to prevent exploding gas tanks.

The death benefits were cheaper, so they continued to manufacture defective cars, even as they lobbied US Congress to block new regulations that would require the changes regardless of cost. Hundreds of people died as a result.

In these cases, the logic of economics provided an excuse to engage in activities that most people would recognize as abhorrent. The public's horrified reactions to these disasters spurred governments to step in and prohibit such activities.

Regulations v. Incentives

These regulations are imposed on the market system from outside it, constraining the range of acceptable economic activities rather than merely changing the balance of incentives and disincentives.

Among economists, cost internalization schemes remain a popular response to calls for tighter regulations. Even though they raise the price of some investments, they preserve the idea that cost/benefit analysis is the only legitimate basis on which to make economic decisions.

A recent example is the tepid Kyoto Accord, which was heavily influenced by the economists who helped draft it. They took a straightforward issue - too much industrial output of greenhouse gases - and turned it into an international stock exchange.

Playing the emissions trading markets may become more interesting and lucrative for a lot of companies than the more painful method of spending the money to clean up their act.

Instead of making substantive changes to wasteful practises, countries and companies can play an elaborate shell game of buying and selling credits, wheedling to have their forests treated as efficiency gains, and making cost-benefit analyses, Ford Pinto-style, on whether to invest in cleaner technology or just buy credits on the market.

Emissions trading might encourage businesses to make sustainable decisions. However, playing the emissions trading markets may become more interesting and lucrative for a lot of companies than the more painful method of spending the money to clean up their act. A couple of progressive superstar corporations could let a lot of other companies off the hook and be slouches.

Worse, complex firms engaging in exotic financial schemes could hide much of the pollution inside elaborate shell games while real companies made no actual progress - an Enron-style emissions trading fiasco that would waste precious time and divert our attention from addressing the problem.

I seriously doubt that market mechanisms will fix the problems created by market mechanisms.

Don't Steal my Sunshine

Ecology encompasses economic activity, and it does this in the wider context of how economic activity affects the ecosystem that sustains it. Economics, by contrast, cannot be expanded properly to encompass the ecosystem that contains it. Attempts to do so must inevitably fail, because the principles of economics do not explain biological systems.

Describing biological systems in economic terms is absurd, but that doesn't stop some economists from trying. Vandana Shiva shares two examples that illustrate this point: a Cargill-India executive talks about bees "usurping" pollen, and a Monsanto document accuses weeds of "stealing" sunshine.

That's why I have a problem with merely "considering" environmental problems when making economic decisions, which the emissions trading system will normalize. Rather than a consideration, basic environmental protection should be a clear boundary that limits the scope of economic activity and restores it to its proper place: deciding how resources are allocated within the scope of what the environment can reasonably sustain. That is, housekeeping, which hearkens back to the original meaning of the word.

Ecology helps us to set those boundaries by mapping the complex relationships in a living system. Once that fundamental boundary is established, economics may indicate profitable courses of action within ecological parameters.

Subset and Superset

An analogy might be found in physics. Newton's laws of motion do not describe the the universe accurately; Einstein's relativity theory is more encompassing, predicting a much wider array of events accurately. However, Newton's model does fairly accurately describe a narrow subset of the universe: small objects moving slowly relative to each other.

It makes sense to use Newtonian mechanics within that narrow scope; who wants to use relativistic equations to calculate the speed of a car? However, we need to keep in mind that it is merely a subset of a more encompassing theory of motion, and it cannot tell us anything reliable about that events outside its own purview.

So it is with economics and ecology. An economist can explain that as, say, lumber becomes scarcer due to clear-cutting, the unit price will go up. An ecologist will go much farther, investigating impacts on air quality, disruptions to wildlife, silt runoff in the water system, effects of water pollution on farming operations downstream that require irrigation, deer invading neighbouring suburbs, and so on.

Economics cannot possibly tell us these things, because its only unit of analysis is the price of an economic activity among people. When the price of food goes up because farmers can no longer use the river, the economist will tell us it's because fresh water has become a scarce resource, whereas the ecologist can tell us it's because we chopped down all the trees.

Setting Boundaries

If we allow ecology to set clear boundaries around economic activities - No, you may not clear-cut this old growth forest - then we can use economics within those boundaries to put our house in order.

Of course, it is much harder to impose this kind of boundary around economics on enterprises that are already functioning in the real world than imposing it on new enterprises; in effect, changing the rules when the game is already in play. A corporation may suddenly find that many of its activities lie outside the boundary of what the environment can sustain, and the price of bringing its affairs in line may be steep.

How might we balance the political realities of the economy with the ecological realities of sustainability and complex relationships?

I honestly don't have the answers, and it may be that some kind of emissions trading system can get the ball rolling. For all my hand-wringing about Kyoto, it's at least an admission that something must be done, and it may well be the first step toward making our commerce sustainable, as long as we all recognize that emissions trading, or whatever regulatory mechanism we employ, is not an end in itself.

Perverse Conclusions

The epitome of economic thinking is to take complex systems and reduce them to monetary values. This strength is within the purview of economics, but quickly turns into a liability when economics tries to take the measure of non-economic events.

As soon as you give ecosystems an economic value, you give them a price, which means that as long as someone's prepared to pay the price, those systems can be bought and sold.

It's a case of economics trying to pre-empt external constraints by drawing ecology under its purview, like using Newtonian math to calculate time dilation close to the speed of light. The numbers come out all funny; the conclusions are perverse.

We've seen all kinds of perverse consequences from economists trying to calculate the value of a life or an ecosystem. Instead, economics should be constrained by what is considered acceptable from an ecological point of view. Then, it can function as it was meant to.

The narrow human activities that economics describes take place on a wider stage, and ecology examines that wider stage. Economics wants us to think of our environment in economic terms, but that just produces absurdities. Instead, we need to start thinking of our economy in ecological terms, an activity that ecology makes possible.

When we do that, we will recognize more clearly the logical limitations of what economics can tell us about the world, and we will be more willing to tie economics down to those areas it's fit to handle.

Ryan McGreal, the editor of Raise the Hammer, lives in Hamilton with his family and works as a programmer, writer and consultant. Ryan volunteers with Hamilton Light Rail, a citizen group dedicated to bringing light rail transit to Hamilton. Ryan writes a city affairs column in Hamilton Magazine, and several of his articles have been published in the Hamilton Spectator. He also maintains a personal website and has been known to post passing thoughts on Twitter @RyanMcGreal. Recently, he took the plunge and finally joined Facebook.

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