Consuming and investing, for today, for the future
Partha Dasgupta explains how economics can manage nature.
Sir Partha Dasgupta is Frank Ramsey Professor of Economics at the University of Cambridge in England. He focuses on the economics of poverty and nutrition, and on environmental economics. Earth & Sky’s Jorge Salazar spoke to him in December, 2004, about the new way in which some economists are beginning to perceive nature, with respect to human economies.
Salazar: It’s my understanding that you, Paul Ehrlich, economist Kenneth Arrow and other scientists were a co–authors on a journal article entitled Are We Consuming Too Much?
Dasgupta: Yes, the paper that you are mentioning was concerned with the question of consumption, largely because people have a notion that it is consumption that is doing all the damage to the natural world. It’s the idea that the damage stems from our urge to consume, and that we are not paying for our consumption.
But I think that, as we point out in our paper, it’s not only consumption. It’s really economic activity that’s involved. At the end of the day, we are interested in consumption, today, tomorrow and the day after.
Today, we consume as well as invest. We invest in, say, roads. We invest in buildings. We invest in knowledge and so on, with a view to providing consumption in the future.
It is consumption we are really interested in, broadly defined, now, of course. But at any moment in time, it’s not pure consumption that is a problem. It’s economic activity that includes investment. You see what I mean?
Salazar: Not exactly.
Dasgupta: Well, at any moment of time, suppose you are looking at Gross National Product, or GNP, for example, which many are familiar with, roughly speaking, as a notion. It sort of summarizes, in some sense, the extent to which there is economic activity in the nation. So, when GNP goes up, you say, there’s more economic activity, more stuff is being produced. That’s intuitively all right, isn’t it?
But if you look at GNP, it can be broken down, at the crudest level, into two components: consumption and investment. Investment is also an activity. It’s what you’re not consuming, what you’re laying aside, and then actively creating further capital stock. Extending a road, improving a building, building houses, that sort of thing. These are investment activities.
But of course, you’re doing that because that will produce further consumption in the future. You’re not building houses just for the hell of it. You’re building houses so that people can live in them, or building roads now so that people can use them for travel purposes. It’s the question of now versus the future.
So, I think the thing that we should be focusing on is economic activity, per se. And that activity uses resources. And the point being that these resources that we are talking about are underpriced on average, and therefore we rely too much on them. And maybe we’d have curbed our activity a bit if they had been priced at a positive level. Then we would economize on them a bit, if you see what I mean.
In some sense, that is the root of why we are particularly interested in the way economies handle nature, or manage nature. There are many, many caveats and special cases that one has to study. Not everything is guided by markets. I’m trying to make a first cut into distinguishing between markets and politics.
Salazar: I’d like to get some of your thoughts on how economists value the environment ? the air we breathe, or the water in our oceans and rivers.
Dasgupta: Now these are all assets, you see. The ocean is an asset. It’s not just one asset, it’s a gigantic asset. As is the atmosphere. As are the forests and the wetlands. These are all assets. And, some of them will have a use now. Others will have a use in the future, and so forth and so on.
But, the first point I was making is that these assets are excessively used, overused, in the sense that we are not paying for them to the extent that we should. We, meaning individually, at the household level or the firm level. That’s why, very often, you hear environmental economists talk about imposing taxes on their use. That lifts the price up, and makes them more scarce.
And so, activities have to be channeled, to economize them a little bit, economize on their use. That’s basically the argument. It’s a very simple argument, that bit. The serious problems crop up at a slightly higher level of generality. That is to say, where can markets operate, and can we leave it to the markets?
Take a very commonplace observation that is made in the United States more than any where else I know. That is, “the market will take care of it.” Now that’s a complete non–sequitor. The reason is that for markets to operate efficiently, you need to have markets as a start. Something can’t work well if it doesn’t exist. And the whole point about this area is that there are no markets for many of these resources because of unenforceable property rights.
That is to say, in many of these environmental goods, there are no markets. So to say that the markets will take care of the environment is plain rubbish, actually. It’s just a piece of rhetoric, hugely misleading rhetoric, because the price of many of these objects is zero, in effect zero, because there are no markets. You can just freely use these environmental goods.
Salazar: You’ve written about what’s called social capital, the human networks that enable collective action. How does social capital play out in valuing nature?
Dasgupta: You mention the notion of social capital. But as I said, usually, in political science, even now, interestingly when somebody talks about politics, they mean the State. One crude way of distinguishing political science and economics is to say that one is concerned with the State, and one is concerned with the Markets.
And I think that that conception is very, very tenacious, Just yesterday when I was reading an article in the Journal of Political Philosophy, on security and rights, it defined rights in terms of the right of the individual against the State. But, there’s more than State and household and firms, There are also communities.
And communities can be extremely liberating, and at the same time be suffocating. You know, Arthur Miller’s great play on the salem witch hunt, The Crucible. That’s about the huge denial of individual rights and freedom, but the denial is coming from an extremely oppressive local community.
Many environmental resources are actually communal resources at the local level. One thinks of the oceans and the atmosphere. And that immediately takes you to the realm of international politics, where the nations are negotiating. But if you study a little wetland, or a microwatershed, the State’s not necessarily involved. It’s a matter of a bunch of villages, trying to collect water to collect water to create a tank, which they can then use for cultivation purposes.
Salazar: In light of recent advancement of the pace of globalization, is there reason to be cautious of something approaching a global village?
Dasgupta: I think, yes and no. I think there are huge virtues in globalization. There’s a polarized debate going on about globalization, one group for it and another against it. It’s just absurd.
The thing to observe is that there are many, many good things that happen with globalization. Nevertheless, at the same time, there are some unintended consequences, which may be extremely detrimental. It’s not very difficult to point out the cases where that can happen.
And there are case studies, too, outlining difficulties at the local level, and opportunities at the local level. I mean the opportunities are there. It’s just that in the United States, the opportunities are constantly being pointed out, and then the radical left will talk about the dangers or the harm.
So, people like myself who sit in the middle get squeezed. One has to study them, and have policies in place, and in particular, to avoid disasters and so forth. The point is that the categories of thought are pretty limited at the moment, by the State, or the U.N. And I think one of the reasons is that people are particularly concerned about global commons, the oceans and the atmosphere, and local newspapers, local channels are obviously more concerned with local issues, local forest or wetlands, or whatever, or a beach.
But many of these local problems are in the third world, and that doesn’t get much publicity because they don’t have quite the kind of voice that you in the U.S. have. And there’s another cut to it, which is that in the United States, the environment gets thought of or perceived as an amenity. The beach gets polluted, or a beautiful wetland where you can watch birds gets damaged, so the birds don’t come anymore, or come less and so forth. Whereas, in the third world, these resources are the mainstay of their household income. And if they get screwed around, I mean if things go wrong there, it’s their livelihood. They’re not just amenities. They’re economic necessities.
So, there is that cut as well, which really needs to be thought through. Usually, rich people can find substitutes. If the beach gets destroyed, you might say, “Well, maybe we won’t go there next year. We’ll go to another place for our vacation.” But poor people can’t move as easily. If their local environment gets destroyed, they are destroyed. They can’t just pack up and go.
