Making the environment count - it is possible for economists to do more to help protect the environment - Column

Contemporary Review, April, 2003 by Keith Suter

ECONOMISTS prefer dead trees. A tree standing in a forest has no standing in economics. It is not -- as far as conventional economics is concerned -- carrying out any 'economic' role. Of course, it provides a vital role in the earth's life support system -- but this is of interest to scientists and not economists. However, as soon as the tree is cut down, then it acquires a status in economics. Its significance grows as the tree is broken up into smaller components, such as paper or matchsticks. The more it is destroyed, the more important it becomes to economic calculation.

This article examines the mismatch between conventional economics and the need to protect the environment. It begins with the example of the gross national product and how it is not quite as useful an indicator as many people think. It then examines why the GNP has remained so popular for so long. It then looks more broadly at some of the major problems that need to be addressed if there is to be a thorough accounting for the environment. There are considerable problems and it may well be that some of these will not be solved. But there are two issues that can be addressed and so should get more attention by economists and others: a more realistic approach to how the GNP tool is used in political discussions, and the creation of a more accurate system for accounting for the damage to the environment.

The Example of the Gross National Product

Economic and political life revolves around the GNP: Gross National Product. GNP is the measure of financial transactions within a country's economy -- the total flow of goods and services produced by the economy over a specified time (usually a year) and it is derived from calculating the total income of a country's residents, whether the incomes come from production in that country or from production abroad. There is also a calculation of the Gross Domestic Product (GDP), which is a calculation of the economic activity within the country, and so excludes the value of exports and imports. But the GNP/GDP distinction is not very important for the main argument here, which is the inadequacy of conventional economics to take the environment into account.

The GNP system has three main limitations. First, if there is no transaction then the item does not 'exist' as far as conventional economics is concerned. A tree in a forest is not involved in any economic transaction, therefore it is not included as an item for GNP purposes. It does not exist as far as GNP is concerned.

Second, if there is no money involved, then again there is no existence. Nonfinancial transactions receive no credit within the GNP system because the GNP is a measure of the movement of money through a national economy. One example concerns the way that older people often get a raw deal from the GNP calculation. They are second largest providers of childcare (after the parents) but their effort receives no recognition within the GNP calculation. They do not receive any direct payment for their effort. Treasury bureaucrats may complain about the cost of older people (such as the provision of pensions) but this is unfair: their old age pensions are included in the GNP but not the contribution they make to child care or other forms of voluntary service. Additionally, criminologists have argued that a major cause in crime prevention is the reduction of child neglect. Child abuse receives a great deal of attention. But children are more likely to get involved in crime if they are neglected (rather then abused). T he neglect takes various forms: some parents do not know where their children are; other parents may care where they are but do not form a close relationship with the children and reward them when they do the right thing; other parents simply do not care about their children. Grandparents (as substitute parents) are very important in stopping the crime rate from being even worse - but their efforts are not reflected in the GNP statistics.

Similarly, feminists have complained that women tend to be ignored by GNP calculations because so much of their work is done on a non-transaction basis in the home. For instance, if I employ a female housekeeper, then I increase GNP. But if I later marry her (and so stop paying her a salary) then I reduce GNP. If a cash value is placed on home duties, then a developed country's GNP almost doubles.

A final example comes from developing countries, which tend to have a low GNP because so much of their economy is based on barter (the exchange of goods and services) rather than specific financial transactions. Their low GNP could be interpreted as laziness or low productivity. In fact they have to work very hard but they get little recognition of this in official GNP statistics.

The second limitation of the GNP system is that it makes no value judgments. The GNP is simply a measure of financial transactions; it makes no value judgment on whether the transactions were socially useful or what impact there may have been on the environment. Thus, crime and car accidents increase the GNP because of the increased work for police, ambulances and prisons. A reduction in crime reduces the GNP. Similarly, a good way to increase British GNP would be to bum down London each year. GNP would grow because of the extra work for fire brigades, undertakers, architects, builders, and plumbers. There would be little to show for all this annual effort--but there would be a higher GNP.