Economics and the environment: Down to earth index

Editorial
The Guardian, Monday 28 December 2009
How much is the planet worth? Not a jot, according to most economists' calculations. Last week, politicians and City analysts got Tiggerishly excited over an official report showing that Britain's economy shrank 0.2% in the three months to the end of September rather than the 0.4% initially reported. Yet that all-important measure of GDP is a 20th-century invention which simply tots up all the goods and services produced in an economy, as valued at market prices. Among all the many things it leaves out is the cost to the environment of this activity. Indeed, it often puts a perverse value on damage to the planet. While another Exxon Valdez would be a huge environmental disaster, the cleanup costs would give a big boost to GDP – fantastic evidence for that old jibe about economics being the dismal science.
Or perhaps it is modern practitioners who are particularly dismal, or myopic. Writing to comrades in Germany in 1875, Karl Marx criticised their assertion that "Labour is the source of wealth and all culture". No, he replied, "Nature is just as much the source of use values (and it is surely of such that material wealth consists!)". Yet it is only in the last 15 years or so that economists have done much more than treat environmental issues – whether smog or global warming – as mere footnotes (or "externalities") to their various measures of human progress. Climate change has forced the issue up the academic agenda, so that an LSE economist, Nicholas Stern, is now a world authority on how to reduce carbon emissions. Other economists have been working on ways to measure natural capital, or environmental damage and depletion (and those rare opposite examples).
Foremost among these is Partha Dasgupta, who has just published a lucid survey of the field for the Royal Society. The most striking bit comes when the economist takes a handful of developing countries and measures their performance along a few yardsticks, such as GDP. To these old favourites he adds the index of wealth, which tries to measure "natural capital assets": forests, oil and minerals, and atmospheric quality. Nearly all of Professor Dasgupta's countries have enjoyed income growth over the past 30 years, but in natural wealth they have all gone backwards. Pakistan's GDP per head rose 2.2% a year between 1970 and 2000 – but its per capita natural wealth shrank 1.4%.
This is interesting and vital work. Interesting because the methods of environmental measurement, and the parts of the environment measured, are still crude (the wealth index does not include water or soil); vital for, well, obvious reasons. In nearly all their earlier calculations and prescriptions, economists have taken the earth for granted. Time to get real.