Until recently I, like most people, looked to official statistics like GDP, GDP per capita, and associated discussions related to productivity, capital investment, and so on, to guide my thinking and views on the state of the economy. But now I believe that, unless we learn to count differently – properly – and ensure everyone pays a fair price for the goods and services they use, we’ll destroy the ecosystems our civilisation depends on for survival.
Instinctively, I knew something was wrong with the official figures that seem to influence nearly every aspect of our lives. I even wrote a blog about it a few years ago. It was during that process that I first and belatedly came across Kate Raworth and her 2018 book Doughnut Economics: Seven Ways to Think Like a 21st Century Economist. That put my unconscious discomfort in a more substantive and evidence-based place and, most importantly, took into account the existential environmental and climate challenges we face.
Measuring GDP
Gross Domestic Product (GDP) is a measure of the wealth of an economy. It purports to represent the value of the activities of a nation or region, derived by totalling the value of all commercial interactions in an economy – those millions of consumer and business to business (B2B) transactions and the price of each – to create an aggregate figure. The numbers of people involved in generating a particular GDP provide some measure of productivity.
GDP has been at the heart of most economic thinking, state budgetary considerations and decisions, and wider political discourse for around a century – and it is wrong. Every decision we make is corrupted by the misrepresentation of GDP, especially by overlooking what it does not include.
Economists are very familiar with externalities. These are costs or benefits associated with an activity or transaction that are not directly monetised or accounted for in the price of that activity or transaction.
Take, for example, the external costs of car use. These include road traffic accidents, degraded air quality and its health impacts, and induced demand. There are positives like personal choice and convenience, and wider economic benefits (though they’re often captured in business cases to support road building) and agglomeration effects. The negative externalities are typically bigger and socialised.
To be clear, the freedoms, choices, and conveniences of our modern world often have wider costs not borne by each individual enjoying those benefits.
Unexamined externalities
Sometimes externalities have an immediate impact, as with the loss of trees and animal habitats in the Amazon for the raising of beef, or CO2 emissions from car use. Some take longer to show effects; for example, low-density sprawl resulting from car-friendly planning systems.
One thing is now clear to me. The major externalities associated with nearly all our transactions, especially those by consumers, levy a cost to the environment. Either through carbon emissions or by wider environmental degradation – especially loss of precious and unique ecosystems. This is now, quite literally, a burning issue.
When there were relatively few humans, not engaged in modern and globalised economic activities, then external costs imposed by cutting down trees or the loss of animals and ecosystems were a small imposition the world could handle with barely a ripple. In effect, Planet Earth accumulated these costs in a planet-sized bucket of which we were largely unaware. So we behaved like it didn’t matter. And we still do.
However, our species now numbers nine billion people, most in rapidly growing economies. We need to value our natural environments if we want to protect them. For example, what’s the value of a bee, a tree, or clean air? If there were suddenly no bees or trees and all air was as polluted as that coming from a car (tail pipe and tyre/brake particulates) with even more CO2, our planet would be in even more serious trouble than it already is. Life as we know it would be impossible.
An overflowing bucket
So bees, trees, clean air, and keeping CO2 at or below currently elevated levels clearly each have a value. The question is, are those values represented in our economic and commercial transactions and so, ultimately, in GDP? No.
They are external to it. As are the costs we’ve been unconsciously throwing into that planet-sized bucket for hundreds of years. It’s like a planetary off-balance sheet liability account. That bucket is now overflowing, and planetary auditors have found a major accounting error in our calculation and treatment of GDP, given the scale of environmental liabilities built up.
Starkly, those countries which experienced the most GDP growth and have the biggest GDPs are producing the most external costs. For example, GDP is correlated strongly to CO2 emissions. Historically, people and countries with the highest GDP per capita have generated the most negative costs – and so have done the most damage to the planet.
Most great entrepreneurial endeavours, and those who made their fortunes by them, have often ‘succeeded’ because they never had to account for externalities. If they had, perhaps some would still be wealthy and fairly remunerated for their efforts, but the scale of gains would likely be much lower.
Which iPhone version do you have?
Consumer products now have built-in obsolescence and need replacing every few years. We used to repair things; now we plunder the planet for natural resources to make products that end up in landfill within a few years. This is madness.
We transport New Zealand lamb to Wales in flying fridges. Trees are uprooted in the Amazon to raise cattle to make burgers for (often overweight) people in Europe. We rip out mangroves and destroy orangutan habitats to grow palm oil. Newer, bigger, heavier cars are replaced more often. Intensive farming results in the loss of hedgerows and habitats. Of course, there’s the continued production of CO2 that’s pushing our climate and ecosystems to the brink. And now we have the perversity of the drive-through coffee shop.
All are associated with financial transactions that don’t account for their negative externalities, and especially those directly linked with carbon emissions and environmental degradation. It can’t continue and we have to deal with these liabilities whether we like it or not.
I’ll let economists comment on this, but it seems to me that the law of supply and demand and consequent ‘efficient use of resources’ to maximise profits hasn’t been – but should be – constrained by the environmental costs of using those resources. For decades we didn’t really see those costs, but the bill has now arrived, and we all must pay it.
We need to deal with this accounting omission and reassess how we quantify every transaction we make. That means factoring in external costs so that consumers pay a price reflecting the intrinsic value of a tree, a bee, an orangutan, and a planet that doesn’t exceed 2oC of CO2. If these external costs were reflected in consumer and B2B prices we’d make different, more sustainable choices.
Who’s subsidising who?
Wales, with a lower GDP per capita, by default causes less environmental damage than London and South East England, where more disposable income enables more consumer transactions and externalities. I’ve often said the question of self-determination – and its economic viability – will be much easier to address through a complete rethink of how we calculate GDP. It’d be difficult, but necessary, and transformative.
I’m not saying we need to close down the economy, stop driving or flying or buying stuff (though we do need to reduce), or hinder entrepreneurial endeavours. Simply, we have to properly assess, quantify, and apportion negative externalities so they’re reflected in consumer prices. This will result in different consumer choices and a differently shaped economy more in balance with nature – which it must be. We have to recognise that the freedom, choices, and convenience we enjoy come at a cost we’re not (yet) paying.
In the short term this can only come through fiscal and regulatory measures. People won’t like it, but we’ll have to tax and regulate to save the planet. The discount many of us received, especially in more ‘developed’ economies, must end. We must acknowledge that unconstrained capitalism and consumerism have been subsidised, account for previously ignored off-balance sheet externalities and liabilities, and start paying real prices.
We ought also to acknowledge that the UK has one of the lowest tax/GDP ratios in Europe, crumbling public services, and a ballooning debt of trillions. Rather than more traditional taxes, perhaps we can develop more essential fiscal disincentives targeted at negative externalities. This will radically reshape economies. And might save bees, trees, and orangutans at the same time.
Read the original article here.
