01 August 2008

A succinct criticism of modern economics by Clive Ponting in A New Green History of the World, pp. 132-135. I heartily recommend this book which I borrowed from the Singapore National Library. It is a stimulating, concise overview of civilizations' impact on the environment.

There is a fundamental flaw in classical economics and all the modern systems derived from it -- Marxist, welfare, Keynesian and modern ultra-liberal economics. They all deal only with the secondary problem of the distribution of scarce resources between competing ends and how the optimal allocation of resources can be achieved. The resources of the earth are treated as capital - a set of assets to be turned into a source of profit. Trees, wildlife, minerals, water and soil are simply commodities to be sold or developed. More important, their price is simply the cost of extracting them and turning them into marketable commodities. Yet this view ignores the basic fact that the resources of the earth are not just scarce, they are finite. Economics is unable to incorporate this fact into its analysis and so the economic systems based upon it encourage both the producer and the consumer to use up resources at whatever rate current market conditions dictate. Economics assumes, in defiance of all logic, that resources, in terms of land, materials and energy, are inexhaustible and that growth in the overall level of the economy can continue for ever. It also assumes that as one material or source of energy becomes scarce its price will rise and this will encourage the development of substitutes. In the short term this is certainly possible but the process cannot be continued indefinitely into the future. There is no way in economics that current prices can take account of the problems that will have to be faced in the future. (Since there is in theory an almost infinite future ahead of human societies current prices would have to be infinite in order to conserve them for that future.) Instead, economics argues that since the most rational action for individuals and hence societies is to pursue immediate self-interest then there is no need to take account of posterity.

Another problem for economics is that markets and therefore prices do not reflect true costs. Some commodities such as air never enter a market mechanism and are therefore treated as free goods available to all. However, as early industrial societies found out, if commodities such as air and water are treated as free then levels of pollution will rise rapidly because firms do not have to pay a price for the smoke and gases they put into the air or for the waste products and effluent that they tip into rivers. The rest of society does, however, bear the cost of such activities - water not fit for drinking, air not fit to breathe or even simple problems such as people's washing becoming dirty through air pollution. These 'externalities' can only be controlled through government regulation.

Many of these problems are also reflected in the failure of GDP to measure the real state of society and the economy. GDP does not measure some sorts of activity and economic contributions, for example housework if it is done without wages being involved, subsistence agriculture and voluntary community work. The 'black economy' (which is very large in some countries) is by definition not measured. There are also problems with what GDP does measure. It includes many items that are not benefits to society as a whole. For example, the shorter the life of cars and the more frequently they break down, the greater will be the amount of activity in an economy and the level of GDP will rise. This ignores the fact that individuals (unless employed in a car factory of a garage) would be better off if they had more reliable, longer-lasting cars. GDP also takes no account of some of the effects of using cars - higher levels of pollution and greater traffic congestion and delays. Other social problems such as poor housing and health care are also not included. On the other hand some social problems actually lead to a rise in GDP. In the United States as levels of crime continue to rise one of the major growth industries has been in crime prevention and security. This is not worth $65 billion a year and makes its contribution to GDP but its doubtful whether this measures and overall benefit to society. Similarly over-eating, obesity and an obsession with weight have created a diet industry worth $32 billion a year and the stresses of modern life have resulted in sales of Prozac worth $1.2 billion a year, both of which increase GDP. The growing doubts about the failure of GDP to reflect social costs and problems have led in the last couple of decades to attempts to create better measures of the real increase in the standard of living, taking account of factors such as pollution, traffic congestion, crime, health care and access to education. One of these measures is the Genuine Progress Indicator or GPI and it reflects a very different picture from the GDP. In the second half of the twentieth century the GDP per head in the United States rose from $12,000 to $35,000, suggesting a near tripling in the standard of living. However, the GPI would suggest that the standard of living taking account of wider social problems increased by only 8 per cent.

Only a small minority of economists have tried to deal with these deeper questions and raised doubts about the ability of conventional economics to deal with environmental questions. E. F. Schumacher in his book Small is Beautiful, published in the early 1970s, argued for an approach to economics 'as if people mattered'. He never created a coherent economic theory but argued that efforts should be concentrated on questions about the appropriate size and scale for activities and technology and identifying the real needs of people rather than assuming they would be met by ever increasing levels of production and consumption. He characterized this approach as "Buddhist Economics" and although his writings became international bestsellers his ideas have had little impact on policy makers or mainstream economics. Another trenchant analysis of the shortcomings of traditional economics was made by Hazel Henderson in her book Creating Alternative Futures published in 1978. Like Schumacher she criticized the fragmentation of economic thought, its failure to take into account humanity's dependence on the natural world and its even greater failure to recognize the values and unspoken assumptions that lie deeply embedded within it. The result, according to Henderson, is that:
Economics has enthroned some of our most unattractive predispositions: material acquisitiveness, competition, gluttony, pride, selfishness, shortsightedness, and just plain greed.