Economics focus

Never the twain shall meet
Jan 31st 2002
From The Economist print edition

Why do economists and environmental scientists have such a hard time communicating?

ACADEMIC disciplines are often separated by gulfs of mutual incomprehension, but the deepest and widest may be the one that separates most economists from most environmentalists. The ferocious row over “The Skeptical Environmentalist”, a new book by Bjorn Lomborg, a statistician with a taste for economic analysis, is a case in point. We discuss that fight in detail this week in our leader pages and in the Science and Technology section. What underlies rows like this, as well as the more insidious refusal even to engage with the other side, is not so much disagreements about facts as disagreement about how to think.

Almost all economists are intellectually committed to the idea that the things people want can be valued in dollars and cents. If this is true, and things such as clean air, stable sea levels, tropical forests and species diversity can be valued that way, then environmental issues submit—or so it is argued—quite readily to the disciplines of economic analysis. Trade-offs can be struck between competing ends, in principle at least, and one can begin to think about how the world's consumption of environmental goods can be optimised, as economists say, subject to the constraint that people cannot have everything they want.

Most environmentalists object to the very first step in the argument—the idea that environmental goods can be reduced, as they would put it, to a cash equivalent. In fact, most environmentalists not only disagree with this idea, they find it morally deplorable. So tempers on both sides start to be lost at the outset.

Ordinary voters are far more likely to agree with environmentalists on this than with economists. To them it seems absurd and wrong to suppose that a value can be put on, say, the survival of the Indian tiger. Yet the fact remains that choices must be made. Even if environmentalists ruled the world, difficult choices would have to be confronted—and, working backwards from those choices, made according to whatever criteria, it will always be possible to calculate the economic values that were implicitly attached to different environmental goods. Environmentalist rulers might prefer not to know what these implicit valuations were, but that would not alter the fact that trade-offs, measurable in dollar terms, had in fact been struck.

However, this does not prove that moving from values to policy, as economists prefer, will yield better results than working backwards, and deducing (if you care to) values from policy. Suppose that economists are very bad indeed at attaching values to environmental goods. Then it might be better to work the other way round: take a guess at good policy, and leave the economists to do their (pointless) bookkeeping later.

There is a lively debate in economics about valuing the environment, and some strands of the literature do favour, or at least sympathise with, this environmentalist perspective. For instance, a new paper by Philip Graves, a professor at the University of Colorado, suggests that economists systematically undervalue environmental goods, possibly by a lot*.

The standard approach to valuing public goods (including environmental goods) goes back to a classic paper by Paul Samuelson in 1954. It says that, in principle, governments should be guided in providing public goods by what people would be willing to spend on them if the goods could be bought in a market. One difficulty is discovering what people would be willing to spend. But that point is old hat. Mr Graves's idea is that even if you knew how much of their existing incomes people would spend on environmental goods, this would not tell you how much they would spend if they were actually given the choice—because if people could buy environmental goods, they might work harder and earn more, and spend the extra income on them.

Mr Graves guesses that people might work 10% harder on average. (One component of this shift: at least some green activists and drop-outs would get higher-paying jobs, or any jobs, if they could spend their wages on environmental goods.) That number, on which everything depends, looks awfully high. It may seem more plausible in Colorado than it would across the Atlantic in, say, Essex—where, if people had an opportunity to trade less environmental protection for extra leisure and private goods, they would probably take it. Still, if Mr Graves were anywhere near right about this figure, the implied undervaluation of environmental goods by standard methods would be quite enormous.

Does this point the way to détente? Probably not. If Mr Graves is right about the theory and in the ball-park with his number, his analysis favours a very large expansion in efforts to improve the environment. Environmentalists would no doubt applaud that result. But Mr Graves is still, deplorably in their view, trying to attach monetary values to things he ought not. Mr Graves's analysis, and other green-friendly work by economists, is still about economic efficiency, about striking a better trade-off—and, in the end, about finding the point at which further spending on the environment would be too much. How many environmentalists can even imagine such a point?

* “Valuing Public Goods”. The paper has not yet been published but can be read on Mr Graves's website.

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