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Scarce resources: economics and sustainability
Categories: economics

Dan Marsh

The study of how people chose to use their scarce resources in attempting to satisfy their unlimited wants. This explains both economics and sustainability.

University of Waikato’s environmental economist Dr Dan Marsh on the potential benefits for a sustainable future from the application of economists’ focus on allocation of scarce resources in the face of unlimited human wants.

Talking points

Economics is not the bad guy in sustainability. Economics is really about people, why they do what they do, and how we can help people, societies to be better off.

A lot of people think that economics is all about money, that we’re more-or-less the same as accountants, but that’s really not the case – what economists study is how to improve human welfare.

Economics is a really great training in a way of thinking – a way of approaching the problems humans face, which is a great foundation for almost any career – how to think, how to analyse, how to take decisions.

The study of how people chose to use their scarce resources in attempting to satisfy their unlimited wants. This explains both economics and sustainability.

The economic study of scarce resources…we only have one world, we only have a finite world, a finite amount of land, biodiversity, all kinds of things, and we’re worried we’re using too much of it. Yet people always want more. No matter how much we have, we seem to want more.

Economics is saying we’ve got this scarce resource, we’ve got humans who want more and more – how can we allocate what we have in order for the greater good, the best outcomes in terms of human welfare? That is what economics is all about.

A lot of people think that economists just want growth and the expense of other things they don’t really care about – I don’t really think that is true. But economics is a very broad profession. I could say I don’t think it – and that would be true – but someone else could find an economist who does think that.

Economics is not like accounting, not a set of things that all economists should use, say and do. There is no defined body of knowledge in economics – in political terms, people who study economics go from the far left to the far right and everything in between.

Growth is not fundamental to being an economist.

Economics should be able to help people (government, policy makers) work out how to give the people what they want. Most people want to improve their incomes…if we want higher incomes then we need growth – this is simply responding to what people want – the way democracy is supposed to work. But, some people have focussed on a narrow kind of growth, and taken insufficient account of the effects of inequality, and the environment. I would agree that this has happened.

Externalities are central to economics. For me it is about setting the framework so the kind of growth we have is the kind of growth people want. And the kind of growth people want, is sustainable growth.

(Is sustainable growth a sensible term?) I believe it is. I’m somewhat of an optimist in this regard. Optimist in terms of what might be possible with technology, also an optimist in terms of how people and human societies can develop.

An important way of thinking about this is the capital approach. Capital can be divided into three main kinds: Natural capital (environment), social and human capital (people, knowledge, health, well-being) and economic (things that we make). When people say ‘growth is not sustainable’, they are assuming that in order to grow we have to have more natural capital.

The kind of growth I would like, would ensure that we don’t use more natural capital, perhaps cutting back on it, as we look after improved technology, education to grow human capital.

We can see this in natural resource per computing power. By 2020 if everyone has a ‘super computer’ in their pocket, imagine the growth in human welfare from that, a massive change and potential for improvement in human welfare that is using a remarkably small amount of resources.

I like to focus on management, and what governments should be (rather than focus just on individuals and business) for we have to have the right frameworks to give individuals and businesses the right incentives that will make it easier and reward doing the right thing.

We’re a long way from being able to bring into play all the externalities. But there are quite a few areas that we’re beginning to get the basic rules right – incentives for sustainable behaviour.

We we buy something, on average, assuming the market is working, then we are paying the market cost – because otherwise business will go out of business. But we will only be paying full cost when we pay for externalities and only when everyone along the supply chain has been forced to pay for it.

Taking account of all externalities is difficult. I’m a practical person, just taking nito account the main ones is difficult enough – it is probably an unrealistic goal.

But markets undoubtedly fail, and when government intervene in markets they sometimes make things worse. We might meddle so much in our effort to make markets take into account all externalities we might get it wrong and make it worse.

I’m not sure who said that ‘climate change is the mother of all externalities’, but it’s right.

Climate change is the biggest and most worrying externality in the world.

Economists tend to favour emissions trading or carbon tax as they would encourage people who can reduce emissions at the lowest cost to do so – and that’s a very desirable thing.

Sometimes people take the approach that “polluting is a bad thing, find the polluter, tell them what to do”. Economists take the view that we need to get the rules right, get the incentives right to find ways to encourage reduction of pollution at the cheapest cost and we’ll get more reduction – it will cost less, and we’ll have more money for other things.

Often the most expensive reduction is 10-20 times more expensive than cheaper options encouraged by trading. The Rotorua lakes, the cost per unit of nitrates leached into to the lakes, this averages hundreds of dollars per kilogram, but farmers can reduce the same for a few dollars. Why would we start with $100/kg rather than a few dollars?

For the good of the environment, we will get more improvement.

The same applies to the cap and trade around Lake Taupo, a scientifically established bottom line, then discharge allowance within that – yes they pay for the right to pollute. Does this “paying for the right to pollute” matter? Assuming that we have correctly calculated the cap – that this is the sustainable level, does it matter that someone has bought that right?

I understand that people don’t like the idea of someone buying the right to pollute, but the fact is that this mechanism allows us to get pollution reduction at the lowest cost. That person who buys the right to pollute, who sells it to them? The person who can reduce their pollution at the lowest cost.

Non market valuations – natural, spiritual, aesthetics – these things not usually measured in the markets, but environmental economists have developed methods of valuing these things. In some cases a non-market valuation can assist in difficult decisions.

Even people who say the environment shouldn’t be valued end up doing it implicitly (case study of Manukau sewerage treatment).

Quite often for some social questions, it’s not appropriate for economists to be telling people what to do.

The way I see it, it is for society to decide on how it wants to run society – what are its core values, to decide on what is ethical or not ethical – and for economists to use their skills to work within these constraints to try to help society meet what it wants to do.

People have tried to value a species (for example Costanza’s total value of ecosystems, 97, 14), but it is open to dispute. Environmental Economists would focus on changes and changes you might be considering.

Trying to value change in species and biodiversity using non-market techniques is interesting but tricky and highly contested.

Bateman‘s work in the UK to produce a national ecosystem assessment decided not to value ecosystems, so instead used a constraint approach.

We should be cautious about claims about dollar values on species and biodiversity change.

Economics can help us think about benefits and costs that happen at different points in time. The Stern Report on the economics of climate change for example.

The key driver is how much we value costs into the future.

Discounting is a reasonable approach for the next 10-20 years, but I don’t think it is reasonable for inter-generational decisions. Unless we use a discount rate of zero, it will mean we put no weight on future generations – most of us would agree, that’s not ethical.

We do struggle with longer time periods, but we’re all making decisions about how we weigh costs and benefits…all the time, to pretend we can’t do it is now very helpful, the economist’s approach is to see how people are doing it (investment decisions in schools etc).

If the discount rate you use is too high it will mean you start putting a low rate on costs (and indeed benefits) into the future and we should be cautious of that, particularly for intergenerational issues where I think that result might conflict with what we muight conclude from ethics.

(What’s the alternative?) Economists might try to contribute but we shouldn’t pretend that we’ve got the only answer, we should acknowledge that that’s about ethics and what people feel is right.

(Activist?) Yes, in the sense that I’ve always been. I always says what I think or say I disagree, I’m not too worried about putting my head above the parapet. I am actively involved in trying to use environmental economics to improve New Zealand’s environment. I’ve always argued in favour of the environment, typically trying to help decision makers better understand the value of the environment to the benefit of the environment.

(Challenges?) Too much to do.

(Miracle?) The National Government brings in changes to make NZ’s Emissions Trading Scheme really work, so people who are emitting carbon really would face a realistic cost of carbon. I believe if we could do that, over time we really would get a reduction in NZ’s carbns emissions, and we could do it in the lowest cost way. The main problem is the international linkage – the trouble is the European ETS caved in under pressure and caused the price to crash and our transferrability means our price has crashed. So we need to reduce our transferrability in order to get our incentives correct. It’s really sad the way things are at the moment, it’s not working because the price is too low.

(Advice?) Study economics.

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