Leaders in the Field – Partha Dasgupta

Partha Dasgupta

Partha Dasgupta

Taking the “start anywhere” approach, this is the first in a series of posts on leaders in the field of ecosystem services and natural capital.

I’ve chosen Professor Emeritus of Cambridge University, Sir Partha Dasgupta, to start because his work has been on my mind lately, and because of his outstanding contributions to the field of economics in valuing natural capital, or ecological economics. His recent CV, bio and some publications can be found on the link attached to his name above.

In particular, I found that his recent paper, “Nature’s role in sustaining economic development“, makes a compelling case for not only why, but how natural capital could be incorporated into economic valuation schemes. The paper is free and open to the public to read and covers some basics on economics, GDP, HDI, shadow prices, and a pathway to valuing the true wealth of nations.

Here is a list of some of my favourite quotes from the paper (my comments are in orange):

Some identify environmental problems with population growth, while others identify them with wrong sorts of economic growth. There are those who identify environmental problems with urban pollution in emerging economies, while others view them through the spectacle of poverty. Each of those visions is correct. There is not just one environmental problem.

In the quantitative models that appear in leading economics journals and textbooks, nature is taken to be a fixed, indestructible factor of production. The problem with the assumption is that it is wrong: nature consists of degradable resources. (This is one of my all time fav natcap quotes.)

Judging by the profession’s writings, we economists see nature, when we see it at all, as a backdrop from which resources and services can be drawn in isolation. Macroeconomic forecasts routinely exclude natural capital. Accounting for nature, if it comes into the calculus at all, is usually an afterthought to the real business of ‘doing economics’. We economists have been so successful in this enterprise, that if someone exclaims, ‘Economic growth!’, no one needs to ask, ‘Growth in what?’—we all know they mean growth in gross domestic product (GDP).

Why do not market prices reflect nature’s scarcity value? If natural capital really is becoming scarcer, would not their prices have risen, signalling that all is not well…The problem is that if prices are to reveal social scarcities, markets must function well. For many types of natural capital, though, most especially ecological resources, markets not only do not function well, often they do not even exist.

We can state the problem thus: ill-specified or unprotected property rights prevent markets from forming or make markets function wrongly when they do form. (See paper for a great exploration on property rights issues.)

Being underpriced, nature is overexploited. So, an economy could enjoy growth in real GDP and improvements in HDI for a long spell even while its overall productive base shrinks. (This was the case for Grand Banks until the cod collapsed.)

As proposals for estimating the social scarcity prices of natural resources remain contentious, economic accountants ignore them and governments remain wary of doing anything about them. (Time to change this.)

The ethics underlying PES are seemingly attractive. If decision makers in Brazil believe that decimating the Amazon forests is the true path to economic progress there, should not the rest of the world pay Brazil not to raze them to the ground? If the lake on my farm is a sanctuary for migratory birds, should not bird lovers pay me not to drain it for conversion into farm land? Never mind that the market for ecosystem services could be hard to institute, if a system involving PES were put in place, owners of ecological capital and beneficiaries of ecological services would be forced to negotiate. The former group would then have an incentive to conserve their assets.

Sustainable development demands that, relative to population numbers, future generations have no less of the means to meet their needs than we do ourselves; it demands nothing more. But how is a generation to judge whether it is leaving behind an adequate productive base for its successor? (One of the pressing questions of our time.)

The values to be imputed to assets are known as their shadow prices. Formally, by an asset’s shadow price, we mean the net increase in societal well-being that would be enjoyed if an additional unit of that asset were made available, other things being equal. As shadow prices reflect the social scarcities of capital assets, it is only in exceptional circumstances that they equal market prices. (This sounds important but I’m going to have to do more reading on economic theory to understand it!)

The value of an economy’s entire stock of capital assets measured in terms of their shadow prices is its wealth…It can be shown that an economy’s wealth measures its overall productive base…So, if we wish to determine whether a country’s economic development has been sustainable over a period of time, we have to estimate the changes that took place over that period in its wealth relative to growth in population. The theoretical result I am alluding to gives meaning to the title of perhaps the most famous book ever written on economics, namely, An inquiry into the nature and causes of the wealth of nations. Observe that Adam Smith did not write about the GDP of nations, nor of the HDI of nations; he wrote about the wealth of nations. It would seem we have come full circle, by identifying sustainable development with the accumulation of (comprehensive) wealth. (I’m seeing many similar references in other literature on what Adam Smith really mean lately.)

It should not surprise you that estimating shadow prices is a formidable problem. (I was relieved in reading this that I’m not the only one struggling with this concept.)

The figures we have just studied are all very rough and ready, but they show how accounting for natural capital can make a substantial difference to our conception of the development process.

So long as we rely on GDP and HDI and the many other ad hoc measures of human well-being, we will continue to paint a misleading picture of economic performance.  

The figures we have just studied are all very rough and ready, but they show how accounting for natural capital can make a substantial difference to our conception of the development process.

Development policies that ignore our reliance on natural capital are seriously harmful—they do not pass the mildest test for equity among contemporaries, nor among people separated by time and uncertain contingencies.