How to Make an Economist’s Blood Boil

by | Aug 7, 2013 | Uncategorized

I knew I should avoid this article when I read the title “The Downside of Valuing Nature”. But I read it anyway and raised my blood pressure.

It started out well enough. I nodded my head in agreement as I was sucked into the article:

“On this we can agree: The relationship between people and the natural world is broken. We fail to value the systems that keep us alive. We treat both natural resources and the biosphere’s capacity to absorb our waste as if they were worth nothing. The obvious answer is to place a financial value on what used to be called nature, but has now been rebranded natural capital. There are some magnificent examples of how this could, in principle, spare us from perverse decisions.”

Yup, I agree.

Then came the main thesis. That pricing would not help because knowing the price would not change the decision.

“Even if we didn’t have a number to slap on them, we’ve known for centuries that mangrove swamps are of great value for coastal protection and as breeding grounds for fish. But this has not stopped people from bullying and bribing politicians to let them turn these forests into shrimp farms. If a hectare of shrimp farms makes $1,200 for a rich and well-connected man, it can count for far more than the $12,000 per hectare of intact mangrove forest is worth to downtrodden coastal people. Knowing the price does not change this relationship. Again, it’s about power.”

And then the dreaded privatization ogre raised its ugly head:

“Natural capital accounting can exacerbate the underlying problem. By pricing and commodifying the natural world and then taking the obvious next step – establishing a market in “ecosystem services” – accounting has the unintended consequence of turning the biosphere into a subsidiary of the economy. Forests, fish stocks, biodiversity and hydrological cycles become owned, in effect, by the very interests – corporations, landlords, banks – whose excessive power is most threatening to them. In some cases, the costing of nature looks like a prelude to privatization.”

And while I hate to take issue with a man that quotes Douglas Adams’ The Hitchhiker’s Guide to the Galaxy, I must when he says:

“While natural capital accounting empowers the money men, it disempowers the rest of us. That’s one of the reasons why governments like it. Who needs all that messy democratic decision-making, those endless debates about intrinsic value and beauty and wonder, if you’ve already determined that the meaning of life is, say, 42? And who can gainsay the decision to pulp a forest or blast a coral reef, if the value of the destruction turns out to be worth several times 42? Once we have ceded nature to cost-benefit analysis, we can’t complain if we don’t like the results.”

Ostrich Behaviour

I think that knowing is better than not knowing. Information is power. And prices are the basis for negotiation, deal-making, compromise and, dammit, Pareto-improvement.

We do not need to cede nature to cost-benefit analysis if we don’t like the results. We can do something about it. There is nothing dis-empowering about cost-benefit analysis. Indeed done right it can answer the “what’s in it for me?” question for all involved (environment, community, economy, those evil private corporations, and government). Cost-benefit analysis informs that messy democratic process. It helps messy decisions get made.

Here’s the problem – economists. Economists for years (actually around a century) have been doing welfare analysis and saying “I don’t care who wins and who loses as long as as a whole we, society, are better off”. The basis for this sweeping statement is that winners could, in theory, compensate losers. Whether it happens or not is beyond the scope of the cost-benefit analyst. But it need not be.

A simple concept, called multiple account benefit-cost analysis, can identify the winners and losers and can also help understand where roadblocks to a proposed project may come from.

Economic cost benefit analysis allows for a consistent and comprehensive accounting of all of the pluses and minuses of the project. A project is justified if the price differential times the quantity of units of benefit delivered is greater than the cost.

While a social planner may be interested in whether the project is worthy of further attention or money, most people are interested in the more selfish “what is in it for me ?” question. Economics can answer the social, impact, and selfish questions and multiple account benefit-cost analysis does this.

Economic analysis can answer the questions of those with social, regional, or purely person pecuniary motives. Who pays how much of the cost, who gets how much of the benefits, and who bears the risk is, of course, what all transactions are about. I do agree with Mr. Monblot that bargaining power may determine the outcome, but who has the information will determine who has the power. Knowing what your adversary (partner, customer, supplier, financier) could get out of the deal is the key to maximizing your share of the pie.

It is because project stakeholders have different values, beliefs, and expectations that deals get done. A government may be willing to give up revenue for local jobs, an environmentalist may be willing to pay more for a project that reduces greenhouse gas emissions, and a pension fund may be willing to take a reduced return if it can get inflation protection with low risk.

Sometimes deals and projects fail because they have failed to identify and quantify all of the costs and benefits of the projects. Someone that is incidentally harmed by a project may be able to block it. Deal balancing is the art of distributing the costs, benefits and risks so that everyone is happy.

Not valuing nature because you are afraid you might not like the answer is like burying your head in the sand to avoid danger. Your not putting a price on “ecosystem services” does not mean that no-one will.

And not valuing nature because you are afraid it may become owned by private interests is just as foolish. Everyone should be valuing nature. From their perspective, and then we should be arguing about the value and understanding each other’s value.

OK, with that off my chest, my blood pressure is returning to normal.

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