Category: Public policy

I came across "The Economics of Ecosystems and Biodiversity Interim Report" by The Economics of Ecosystems and Biodiversity (TEEB) here, being highly recommended by some, and which apparently raises some fundamental questions.

However, as soon as I opened the report and came to the Preface (page 5) I found such absurd claims that I've shut the report and decided not to waste time on it further. 

1) "we find poverty and the loss of ecosystems and biodiversity to be inextricably intertwined."

False. Poverty is related to socialist governance everywhere in the world including absence of well-defined property rights. The loot of forests in India by the corrupt bureaucrats and ministers is related to poverty not directly but through the mechanism of bad governance. Lack of freedom is the ONLY perfect correlate of poverty. Societies without the rule of law and freedom suffer environmental degradation AND poverty. That is an iron law that can't be violated.

2) "The second issue is of ethics – risks, uncertainty, and discounting the future, issues which have also been raised in the Stern Review."

This is quite nonsensical. It is like asking the cave man to worry for our needs. We get wealthier over time. That rules out the idea of caring disproportionately for our future generations. If we take care of ourselves well enough, the future will look after itself. Ramsay was wrong. We must always focus on ourselves.

This is another form of the invisible hand: the more you look after your own self-interest the better the society becomes. 

Yes, by all means price externalities and care for the environment, but for that the Coase theorem, along with Pigovian taxes, should do us perfectly well. Standard economics is PERFECTLY capable of dealing with all environmental issues. 

I refer the writers of this report to Steven Landsburg's book, The Armchair Economist who points out numerous fundamental errors of environmentalists. I also refer the writers of this report to Julian Simon's The Ulimate Resource. And to my books.

ADDENDUM 14 August 2010
Comments from a fellow economist in red below) so I thought I'd deal with them in the main blog

On (1) – I reckon you're right, but the existence of one explanatory variable for poverty (bad governance) doesn't negate the existence of other explanatory variables. I highly doubt the correlation (beta coefficient) on the variable for environmental damage/depletion of natural capital would be zero. You might question causation – e.g. bad governance leads to excessive or premature depletion of natural capital.

My response: The most basic flaw with the econometric way of thinking is to start modelling without a theory. Science is a theory-based exercise, not an exercise of fitting the curve. There is no theory that leads directly from environmental damage to poverty. But there is a very strong theory that leads from lack of freedom, through bad governance, to BOTH environmental damage and poverty. Explanatory variables must be independent to rule out multicollinearity. In this case I can't see how the environmental damage variable is independent. Why is there environmental damage? That is the cause. And that is bad governance which, in turn, is predicted by the lack of freedom in society.

General comment: Economists are good at maximising the size of the cake and poor at splitting the cake (an equity issue – which we leave to politics). The same argument might extend to notions of 'sustainability' or 'inter-generation equity'. That said, we also understand that there is a difference between dynamic and static models – e.g. the idea of 'investment'. This suggests that economists can probably help define the amorphous concept of 'sustainability' (e.g. optimisation of consumption/investment over time). I imagine that even the cave man put a few morsels of mammoth meat aside for a rainy day (so to speak)… to last through winter…  or maybe even to feed its (unborn?) offspring. Another idea: future generations can not express their preferences in any present market (even where they exist). Is this a type of (inter-termporal) market failure which will mean society will more often than not get the inter-temporal optimisation 'wrong'? 

My response: I disagree that there is any equity issue in society. The ONLY equity issue is that of deep poverty. And that means a social minimum provided for through the social insurance program. The need for such insurance has dropped significantly in the West but these societies are now on a ruinous path because they want a welfare state (semi-socialist), thus destroying all incentives to work and to gain skills. Equity is a productivity demolishing concept, if used in any sense beyond the social minimum.

Let me explain the inter-generational issue thus: If I care for the environment, it is incumbent on me to take care of it during my lifetime, so I gain its benefits. That is why the economist insists on resolving negative externalities TODAY, for the current generation. If I am able to ensure a good clean environment today for myself, then would it not be tautological that a good clean environment would be passed on to my kids? So by taking care of MYSELF I take care of my kids. That is how the Ramsay problem is solved. By becoming rich I provide better for my kids. By ensuring a clean environment today, I ensure a clean environment for my kids. Let us take care of OURSELVES and our kids will find it easier to take care of themselves. Let us generate knowledge, let us generate wealth, let us do the right thing for the environment. That's all that is needed – or expected of us. Any other conception is misguided. In DOF I explain this at length. It is called enlightened self-interest.

In any event, the best way to conserve the environment is to apply classical economic theories and either ensure that the offender internalises the externality, or where possible, property rights enable the relevant parties to negotiate an outcome (Coase solution). I'm not arguing against regulatory standards in this area, but I'm arguing for restraint and good cost-benefit analyses.