Stock and flow measures are intimately related, much as they are in a set of corporate accounts. A company has machinery and a skilled workforce that help it produce goods and services to generate an income this year and in future years. It can run down its assets to generate more profits now, or build up assets, suppressing today’s income in order to make more money down the road. For example, it could stop replacing machinery to maximize profits today. At some point though the machines would grind to a halt. Alternatively, it could invest in next-generation robots or send its workers on expensive training courses to upgrade their skills. Both would maximize competitiveness (and profits) tomorrow, but at the cost of lower profits today.
Take a household. In a rich country a person’s assets might include her house, her investments, and an estimate of her likely future lifetime earnings and pension adjusted to today’s prices. “That’s a stock, and it’s what enables you to have a plan of life. You could eat into it if you wish—say, to educate yourself. You might be disinvesting some of your assets in order to acquire some other asset, namely human capital.” In a poor country a person’s assets might include land, livestock, or the right to fish in communal waters off the coast. In hard times you might sell your cow to buy food to maintain your own human capital (in this case physical strength) and to pay for transport to the city to find salaried work. “You are converting one form of capital into another.”
The assets of a household or a nation go beyond physical assets, whether natural or industrial. They include skills, counted for example in trained carpenters and the number of professionals with PhDs. You can stretch the idea as far as cultural capital. Take two identical islands. On the first households have absolutely no trust in one another, and on the other they have absolute trust. On the island with trust trade across households is possible because people trust one another to fulfill their side of the bargain, say providing milk for a year in return for two blankets. But in the other there’s no trust and thus no prospect of exchanging goods between households. The futures of the two islands are going to be entirely different, even if they start with exactly the same asset base.5
Let’s stick for the moment to natural capital. “Contemporary models of economic growth and development regard nature to be a fixed, indestructible factor of production. The problem with the assumption is that it is wrong,” Dasgupta writes. “Nature is a mosaic of degradable assets. Agricultural land, forests, watersheds, fisheries, freshwater sources, estuaries, wetlands, the atmosphere—more generally, ecosystems—are assets that are self-regenerative, but can suffer from deterioration or depletion through human use.”6
In gross domestic product, Dasgupta says, “the rogue word is ‘gross.’ ” That is because it does not count the depreciation of assets. “If a wetland is drained to make way for a shopping mall, the construction of the latter contributes to GDP, but the destruction of the former goes unrecorded.” If the social worth of the mall was less than the social value of the wetland, “the economy would have become poorer—wealth would have declined—and potential well-being across the present and future generations would mimic that decline. But GDP would signal otherwise.”
There are three interlocking reasons why we should think about the stock of wealth in addition to the flow on which “growth” is based.
First, to do so helps societies make better decisions about the interplay between stock and flow, between the present and the future. For an individual, if you know how much money you have in the bank, you know how much you can afford to spend on, say, a master’s degree that may eventually bring rewards (in addition to the pleasure of learning) in the form of higher earnings. At the level of a nation, there are myriad occasions when it would be useful to weigh the advantages of using income to build up capital stock or sweating assets to generate more growth. Free university education, for example, might seem like an unaffordable economic sacrifice, but if you were measuring the stock of wealth rather than the flow, all those additional educated people might look like an increase in your nation’s wealth, not a diminishment of its growth. The same goes for investing in infrastructure, say high-speed rail, in anticipation of future returns on investment. How one accounts for these things matters. In the US independent senator Bernie Sanders and in the UK Jeremy Corbyn, the opposition Labour leader, both want to increase public funding and scrap student fees. Their policies look less radical—and therefore more plausible—from a wealth-accounting perspective.
The second reason for counting assets is that today’s actions have an impact on future generations. Recording today’s national income offers no help whatsoever when making intergenerational decisions. The signal it sends is to maximize growth today no matter what the impact tomorrow. At the extreme, one generation might use up all a nation’s forest cover and all its oil reserves in the interests of double-digit growth and in the expectation that future generations will somehow sort things out. Today a government pushing such policies would point to rapid growth as a justification for its actions. But a wealth measure would show a sharp fall. That would at least give voters pause, by offering a clearer picture of the trade-off. WEALTH FALLS 5 PERCENT does not make quite as good a headline as ECONOMY GROWS 3 PERCENT. Getting a handle on wealth would give present generations the chance to see more clearly what sort of future they were leaving their children and grandchildren.
The third, closely related, reason for considering wealth is sustainability. Put starkly, measuring wealth could help societies avoid collapse. Easter Island, 2,000 miles off the coast of South America, is a well-known example of a once-flourishing civilization that imploded. It is famous for its mysterious stone-head carvings, which now lie abandoned and desecrated.7 When the island was “discovered” by Dutch explorer Jacob Roggeveen on Easter day in 1722 it was already a barren grassland without a single tree or bush over ten feet tall. Though it was inhabited by Polynesians, once famous for their seafaring skills, the islanders had been reduced to paddling about in decrepit canoes. Many lived in caves and scratched out a miserable living. Yet once Easter Island had looked very different. When it was first settled, in about AD 400, it was covered in trees and bushes and had abundant wildlife, offering its inhabitants a rich diet. By AD 1200 the islanders had started to carve the big heads from stone found in one part of the island and transport them using logs and ropes several miles to the coast to be displayed on giant plinths.
They had felled the trees not only for the purpose of transporting the stone heads, but also for firewood and for building homes and canoes. What could have possibly induced the islanders to cut down the last tree on which the whole civilization depended? In reality the destruction would not have come about this way. Instead, it would have happened gradually, like the proverbial frog being boiled alive in an imperceptibly warming bath. Easter Island’s civilization collapsed not with a bang—or the strike of the last ax on the last tree trunk—but with a resigned croak. By the time Roggeveen arrived, its population had fallen to between a quarter and a tenth of its peak, the flora and fauna had been all but destroyed, and the civilization mangled. The islanders, who once feasted on a rich diet of porpoises, shellfish, and seafood, had apparently sunk into cannibalism. Their most “inflammatory taunt” was “The flesh of your mother sticks between my teeth.”8
Easter Island is the earth writ small, a parable of what can happen to societies if they neglect the wealth on which their livelihood depends. Pointing to a refrain of loggers in northwest America—“Jobs over trees”—Jared Diamond, an American geographer and polymath, says that modern societies are not immune from sudden collapse. Far from it. “If we continue to follow our present course, we shall have exhausted the world’s major fisheries, tropical rainforests, fossil fuels, and much of our soil” in a few generations, he says. “Perhaps someday New York’s skyscrapers will stand derelict and overgrown with vegetation, like the temples at Angkor Wat and Tikal.”
Keeping an ac
curate record of a society’s wealth is not enough in itself to stave off catastrophe. Scientists have been warning for years about the dangers of global warming, providing strong evidence of the link between carbon emissions, raised temperatures, and observable and possible future environmental changes. Yet, without the acceptance of the science or the political will to act, all the data in the world is not enough to make societies adjust. Who knows whether the Easter Islanders, had they been in possession of sophisticated wealth accounts showing their practices were unsustainable, would have changed course and saved themselves? And yet measuring must be the starting point. Without that, as a species we may be doomed to repeat the Easter Islanders’ collective suicide.
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Dasgupta thinks of it like fish in a giant pond. “If the size of the fish population is low, then there is plenty of food in the pond and the fish population grows. If there are too many fish, then they can’t manage on the food supply and so the stock declines.” Without the intervention of humans, the fish stock would reach a natural equilibrium based on a given supply of food and nutrients. “Now come some fishermen. They can catch fish and of course the stock declines. But that doesn’t mean that they’re necessarily ruining the fishery because if the stock declines, then the net output of fish, the reproductive rate, could rise because there are fewer of them. They are eating up less of the food, so they reproduce at a faster rate. But, if you constantly take more, then eventually it collapses.” Managing a fishery efficiently thus means taking out just the right amount of fish so stocks can regenerate.
“Think of the biosphere as being like the fishery in a stable state. Then, as we grow, we are living off more of the biosphere’s output and changing the state of the output. And you ask the question, the amount of biomass we are converting for our purposes, how does that compare with the biomass that’s being produced by the biosphere? The footprint is really the ratio of the demand and the supply.”
The methodologies for measuring natural wealth all have their difficulties, but the problem of underpricing natural resources—or treating them as free—demands some sort of response from economists. Why should putting a price on nature help us to see what we are doing and maybe stop us from doing it? “Suppose you’re an entrepreneur and you are trying to develop a new technology for producing honey or whatever, or a new type of car,” says Dasgupta. “Are you going to economize in your design on the expensive stuff or are you going to economize on the cheap stuff? Well, you want to economize on the expensive stuff. Now, if natural capital is underpriced, the direction of technological change is inevitably going to be toward more rapacious types of discoveries. It’s very natural. Air is free. Water is free. We know that oil is underpriced because it is not dictated by the fact that there’s this huge externality [carbon] every time you burn a gallon of petrol. And if it’s underpriced, then there will be a tendency for technological change to be slow. In other words, technological innovations are biased against nature.”9
As with the Easter Islanders, catastrophe could creep up on us rather than coming all at once. The gradual destruction of species and biodiversity is one worrying sign. “I’m not talking about kangaroos and tigers. I’m talking about the ones you don’t see: all the bugs and the birds, the pollinators and the decomposers. You have a variety of statistics—markets, if you like—which suggest that we are stretching and we have been stretching for some time now.” It’s all too easy to be optimistic about human progress. “We live longer, we eat better, we are taller, we are better educated, we are enjoying goods and services, we travel. But are we short-changing the future in doing that? Are we borrowing from the future? Borrowing from the future by, for example, dumping so much carbon that we are going to be in trouble. The answer, in all likelihood, is yes. We are going to be in trouble.”
11
A MODERN DOMESDAY
The Domesday Book, completed in 1086 on the orders of King William the Conqueror, was a survey of land in England and much of Wales. Its purpose was to catalog what people owned and therefore what taxes were due, as well as to establish the extent of lands controlled by the Crown following the upheavals of the Norman Conquest. As with Oliver Cromwell’s mapping of conquered lands in Ireland and the early days of GDP itself, the impulse to measure what we now know as the economy often stirred as a consequence of war.
According to the Anglo-Saxon Chronicle, a medieval annal, William the Conqueror’s voluminous text sought to record “what, or how much, each man had, who was an occupier of land in England, either in land or in stock, and how much money it were worth.” Because its findings were final, it came to be known as the Domesday Book after the Day of Judgment, though the manuscript refers to itself more prosaically as a descriptio, or survey. So detailed are some sections that individual heads of livestock are recorded in its all-knowing pages. “Not even an ox, nor a cow, nor a swine was there left, that was not set down.”1
The Domesday Book was the Google Maps of its age. It was also a balance-sheet view of the world that, more than 900 years later, our modern statistical agencies—for all their survey techniques, computers, and satellites—have failed to match. A modern Domesday would fill a gaping hole in the way that we think about our economy by creating a balance sheet of our assets, both natural and physical. “It would not be a pretty sight,” says one proponent, who argues that it would show humans are unsustainably running down their resources in the interests of growth. But “dressing up economic performance in the brighter colors of GDP does not alter the reality.”2
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Let’s start with natural capital. Or to give it its more colloquial name, nature. If we were to put a dollar amount on it, what would nature be worth? We know from the Bible that it was created in just six days. Not that big a deal, then. So what do you reckon? How about $33 trillion?
That figure is not actually made up. Or at least not made up by me. It is the work of Robert Costanza, a famous “ecological economist.”3 His $33 trillion was presented in a breakthrough—and extremely controversial—paper published in 1997 by Nature, a scientific journal, under the headline PRICING THE PLANET. It was attacked both by economists, who thought it was ridiculous to put a price on “ecosystem services” (in the hideous jargon), as well as by environmentalists, who objected to the very idea of attaching a cash value to something as precious as a rain forest or a meadow. Lord Darlington in Oscar Wilde’s Lady Windermere’s Fan quips that a cynic is “a man who knows the price of everything and the value of nothing.” Instead of cynic, perhaps he ought to have said economist.
Still, if you don’t put a monetary value on something, people tend not to value it at all. Unless governments can make an economically rational case for saving this beachfront or for preserving that wetland, nature almost always loses out to the imperatives of growth. Economic textbooks look at the world through inputs of labor, capital, and knowhow and through the mediums of production, exchange, and consumption. More often than not, nature doesn’t get a look-in.4
If we hold our noses for a moment and try to put a price tag on nature, where on earth do we start, given that air and water, let alone complex ecosystems, are rarely traded? Rain falls free of charge and trees push up toward the light of their own accord. Nutrients are silently recycled. Ecosystems are so complex and delicately balanced, we often have only the loosest grasp of how they perform their regenerative miracles. So how can we possibly put a price on these activities? The answer is that we can’t. But economists have managed to develop some—admittedly extremely crude—methods to work out what they call a shadow price for goods or services where no market exists. This involves either working out proxies for what people are willing to pay (revealed preference), or by asking them directly (stated preference). One proxy method is to figure how much it would cost to build a man-made equivalent. New York City worked out that the ecosystem services delivered by the Cat
skill Mountains, which provide a natural purification service for New York’s drinking water, would cost $8 to $10 billion to replicate with a man-made water-treatment plant.
Many of the calculations in Costanza’s landmark paper were a synthesis of similar research conducted in more than a hundred separate studies. He and his co-authors supplemented these findings with calculations of their own. The paper divides the natural world into sixteen biomes, such as oceans, forests, wetlands, lakes and rivers, and seventeen ecosystem services, including water supply, pollination, food production, cycling of nutrients, soil formation, genetic resources, recreation, and culture. It then produces a matrix estimating what, if anything, each biome contributes to each service. The ocean, for example, contributes nothing to pollination or soil formation, but plenty to food production and “cultural services.”
But what is the price of things as subjective as the ocean’s aesthetic, artistic, educational, spiritual, and scientific benefits? The proxy that Costanza uses is the price premium commanded by coastal properties over non-coastal properties. This shows what people are willing to pay to be near the sea, a revealed preference. Costanza uses the figure of $76 a hectare. Extrapolating for the entirety of the world’s oceans, that works out at $2.5 trillion for the whole lot. I warned you this was crude.
In each calculation the methodology employed establishes a quasi-market price by discovering what people are willing to pay for the natural asset under consideration. Although not included in Costanza’s paper, for example, how much are the 1,000 or so mountain gorillas that inhabit the rain forests of Rwanda, Uganda, and the Democratic Republic of Congo worth? One method might be to find out how much people are willing to spend to see them. That includes airfares to central Africa, the cost of hotels and gorilla-viewing permits, which in Rwanda cost $1,500 per hour and are rationed like gold dust. (Remember this is an entirely Homo sapiens view of the world.) These magnificent—and incredibly gentle—animals, which this author was fortunate enough to see in the bamboo forests of Uganda, are also deemed to have what economists call an existence value. That is determined by the amount that people would be willing to pay to have them exist, even if they had no means or intention of actually visiting them.
The Growth Delusion Page 15
