Sunday, December 17, 2006

Econoworld and the Future

That most excellent blogger and polymath, Brad DeLong, commends for our reading what he calls Partha Dasgupta's excellent review of Jared Diamond's collapse. I'm afraid that I can't agree.

I disliked the review a lot. Firstly, his main quarrel with Diamond is that Diamond wrote a different book than Dasgupta would like. More about that later. More fundamentally, the review seems quite dishonest in the way it interprets what Diamond did say. Consider his only quote from Diamond:

At one point he claims that ‘all of our current problems are unintended negative consequences of our existing technology,’ to which I felt like shouting in exasperation that perhaps at some times, in some places, a few of the unintended consequences of our existing technology have been beneficial. Reading Diamond you would think our ancestors should all have remained hunter-gatherers in Africa, co-evolving with the native flora and fauna, and roaming the wilds in search of wild berries and the occasional piece of meat.

To understand the dishonesty of Dasgupta's point here, you need to realize that in the passage quoted, Diamond is responding specifically to the argument that we don't have to worry about the environment because "technology will solve our problems." Moreover, the "all of our current problems" clearly is referring to all of the current problems with global environmental damage. The claim that Diamond thinks "our ancestors should all have remained hunter-gatherers in Africa" is completely absurd and false.

Dasgupta makes many errors, some of which suggest that he didn't read the book very carefully. He claims:

he [Diamond] describes how Rwanda’s collapse as a society was brought about by unprecedented population growth in a subsistence economy operating in a fragile ecosystem.

That is blatantly false. What Diamond describes is how unprecedented population growth in one of the richest and most fertile environments on Earth brought on social collapse.

So why is Dasgupta misrepresenting Diamond? Well his second gripe with Diamond seems to be based on the notion that Diamond should have acknowledged that economics has a toolbox for solving all questions of environmental impact:

The many people who will be reading Diamond’s book will be fascinated by the historical case studies, but they will also be left with the impression that there is still no intellectual toolkit with which to deliberate over the most significant issue facing humanity today. Worse, they may not even notice they haven’t got the tools. So readers will continue as either environmentalists or environmental sceptics, each locked into their own perspective. It is a great pity.

Dasgupta makes his own argument:

Diamond’s reading of the collapses is original, for nature doesn’t figure prominently in contemporary intellectual sensibilities. Economists, for example, have moved steadily away from seeing location as a determinant of human experience. Indeed, economic progress is seen as a release from location’s grip on our lives. Economists stress that investment and growth in knowledge have reduced transport costs over the centuries. They observe, too, the role of industrialisation in ironing out the effects on societies of geographical difference, such as differences in climate, soil quality, distance from navigable water and, concomitantly, local ecosystems. Modern theories of economic development dismiss geography as a negligible factor in progress. The term ‘globalisation’ is itself a sign that location per se doesn’t matter; which may be why contemporary societies are obsessed with cultural survival and are on the whole dismissive of our need to discover how to survive ecologically.

Since Diamond has now written two books on the centrality of Geography in human history, it's fair to say that there is a basic disagreement here. Dasgupta goes on to argue for his point of view:

The more important reason why Diamond’s rhetoric doesn’t play well any longer is that it presents only one side of the balance-sheet: it ignores the human benefits that accompany environmental damage.

Again, utterly dishonest. Diamond understands that point very well. His argument, made very clearly to anyone who has read the book carefully, is that it is exactly those benefits which propel societies to ignore the downside.

Dasgupta, again:

Here I should put my cards on the table. I am an economist who shares Diamond’s worries, but I think he has failed to grasp both the way in which information about particular states of affairs gets transmitted (however imperfectly) in modern decentralised economies – via economic signals such as prices, demand, product quality and migration – and the way increases in the scarcity of resources can itself act to spur innovations that ease those scarcities. Without a sympathetic understanding of economic mechanisms, it isn’t possible to offer advice on the interactions between nature and the human species.

Ah, the magic of the market. One reason, I think, that natural scientists have trouble taking economists seriously, is that they seem to imagine that they can pronounce sensibly on nature without knowing anything about it - from Marx to Lonborg. All this on the basis of a theory which every honest economist knows quite imperfectly captures its most fundamental substrate - human motivation and behavior.

Dasgupta is kind enough to explain how he thinks these issues ought to be analyzed:

If the future is translucent at best, what about studying the recent past to see how the human species has been doing? The question then arises: how should we recognise the trade-offs between a society’s present and future needs for goods and services? To put it another way, how should we conceptualise sustainable development? The Brundtland Commission Report of 1987 defined it as ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’. In other words, sustainable development requires that each generation bequeath to its successor at least as large a productive base as it inherited. But how is a generation to judge whether it is leaving behind an adequate productive base for its successor?

An economy’s productive base consists of its capital assets and its institutions. Ecological economists have recently shown that the correct measure of that base is wealth. They have shown, too, that in estimating wealth, not only is the value of manufactured assets to be included (buildings, machinery, roads), but also ‘human’ capital (knowledge, skills health), natural capital (ecosystems, minerals, fossil fuels), and institutions (government, civil society, the rule of law). So development is sustainable as long as an economy’s wealth relative to its population is maintained over time. Adjusting for changes in population size, economic development should be viewed as growth in wealth, not growth in GNP.

There is a big difference between the two. It is possible to enumerate many circumstances in which a nation’s GNP (per capita) increases over a period of time even as its wealth (per capita) declines. In broad terms, those circumstances involve growing markets in certain classes of goods and services (natural-resource intensive products), concomitantly with an absence of markets and collective policies for natural capital (ecosystem services). As global environmental problems frequently percolate down to create additional stresses on the local resource bases of the world’s poorest people, GNP growth in rich countries can inflict a downward pressure on the wealth of the poor.

A state of affairs in which GNP increases while wealth declines can’t last for ever. An economy that eats into its productive base in order to raise current production cannot do so indefinitely. Eventually, GNP, too, would have to decline, unless policies were to change so that wealth began to accumulate. That’s why it can be hopelessly misleading to use GNP per head as an index of human well-being. Recently the World Bank published estimates of the depreciation of a number of natural resources at the national level. If you were to use those data (and deploy some low cunning) to estimate changes in wealth per capita, you would discover that even though GNP per capita has increased in the Indian subcontinent over the past three decades, wealth per capita has declined somewhat. The decline has occurred because, relative to population growth, investment in manufactured capital, knowledge and skills, and improvements in institutions, have not compensated for the decline of natural capital. You would find that in sub-Saharan Africa both GNP per capita and wealth per capita have declined. You would also confirm that in the world’s poorest regions (Africa and the Indian subcontinent), those that have experienced higher population growth have also decumulated wealth per capita at a faster rate. And, finally, you would learn that the economies of China and the OECD countries, in contrast, have grown both in terms of GNP per capita and wealth per capita. These regions have more than substituted for the decline in natural capital by accumulating other types of capital assets and improving institutions. It seems that during the past three decades the rich world has enjoyed sustainable development, while development in the poor world (barring China) has been unsustainable.

These are early days in the quantitative study of sustainable development. Even so, one can argue that estimates of wealth movements in recent history are biased. As regards natural capital, the World Bank has so far limited itself to taking into account the atmosphere as a ‘sink’ for carbon dioxide; minerals, oil and natural gas; and forests as a source of timber. Among the many types of natural capital whose depreciation has not been included are fresh water; soil; forests, wetlands, mangroves and coral reefs as providers of ecosystem services; and the atmosphere as a sink for such forms of pollution as particulates and nitrogen and sulphur oxides. If these missing items were to be included, the poor world’s economic performance over the past three decades, including China’s, would undoubtedly look a lot worse. The same would be true for the rich world.

There are further reasons for thinking that the estimates of wealth changes that I have been referring to are biased. They have to do with the way prices are estimated for valuing natural capital. Empirical studies by earth scientists have revealed that the capacity of natural systems to absorb disturbances is not unlimited. When their absorptive capacities reach their limit, natural systems are liable to collapse into unproductive states. Their recovery is costly, both in time and material resources. If the Gulf Stream were to shift direction or slow down on account of global warming, the change would to all intents and purposes be irreversible. We know that up to some unknown set of limits, knowledge, skills, institutions and manufactured capital can substitute for nature’s resources; meaning that even if an economy decumulated some of its natural capital, in quantity or quality, its wealth would increase if it invested sufficiently in other assets. The remarkable increase in agricultural productivity over the past two centuries is a case in point. But there are limits to substitutability: the costs of substitution have been known to increase in previously unknown ways as key resources are degraded. Global warming is a case in point. When the downside risks associated with such limits and thresholds are brought into estimates of sustainable development, the growth in wealth among the world’s wealthy nations will in all probability turn out to have been less than present estimates would suggest. It may even have been negative.

What I have sketched here is the correct way to determine whether contemporary economic development has been sustainable. It is also the correct way to evaluate public policy, for it tells me that a policy should be accepted if and only if it is expected to lead to an increase in wealth per capita. But you won’t find any of this in Diamond’s book.

These few paragraphs, sparsely populated with ideas but rich in trite pieties, constitute the supposed nucleus of the book Dasgupta apparently thinks Diamond should have written.

All of Diamond's collapses represent market failures, broadly interpreted. Diamond seeks the clues for these failures in human biology, culture, and evolution, and, yes, in geography. These properly are economic questions as well as questions of biology and physics, but I see nothing in the history of economics and markets which suggests that economists are anywhere close to having a toolbox which sheds a lot of light on the critical issues.

We live in a world where some paint on canvas in a billionaire's office is worth more than an entire African nation's investment in elementary education. Tell us, if you will, Prof. D., how your theory of Capital is going to ensure optimal allocation of resources.