How To Price a Forest, and Other Economics Problems

John Steele in Nautilus:

Gross Domestic Product is the market value of all goods and services produced within a country in a year. It is, today, the standard snapshot of a country’s economy. But does it deserve this position? After all, it focuses on economic activity while ignoring many of the consequences of that activity, economic or otherwise.

Cambridge economist Sir Partha Dasgupta has long argued for a broader measure of a country’s wealth, and has worked on some of the most difficult challenges involved: How do you assign a dollar value to a forest? To human capital? How do humans understand long-term planning, and the effects of their actions on fellow citizens?

Dasgupta and I met in the Vatican Gardens in Rome, where we were both attending a symposium organized by the Pontifical Academy of Science and the Pontifical Academy of Social Science. Among the most lively and engaged of the symposium participants, Dasgupta challenges us to cast a critical eye onto how we assign value, and how we make decisions…

What should economists be most concerned with measuring?

[PG] Ultimately we social scientists should be concerned with human wellbeing, the quality of lives people lead. That sounds very metaphysical or perhaps repugnant to the hard-nosed social scientist, a policy maker. But at the end of the day that’s what it’s all about, otherwise we should just call it a halt, call our enterprise a halt. The question is not how to measure human wellbeing, because that’s an impossible thing, but whether you can find some metric which more or less approximately corresponds to it. So two things can move in the same way, even though they are not the same thing. The metric which best, and it can be proved to be so, mimics movements of human wellbeing, no matter how you define human wellbeing, is the measure of wealth. Wealth was originally a word used to define wellbeing, but that’s not how I want to use it. The result I’m quoting, the metric that you were asking for, is a value of all the assets an economy has inherited from the past. And the assets include not just buildings, machinery, roads, and equipment, the stuff that we typically think of as being capital goods, but also our health and education, which now economists all agree consist of asset, which we call the human capital. But a third category, and that’s the one we are discussing here at the Pontifical Academy, is natural capital, nature, which comes in abundance and in various forms and sizes.

Let me give you an example of why wealth, which is the value of these assets, could be going down even when GDP goes up. Imagine now, just to take a simple example, suppose you convert a huge swathe of wetlands and construct shopping malls, just as an illustration. Now, in national accounting, from which you can estimate GDP, the shopping mall will be an investment; the amount that you’ve spent will be counted as investment. But the fact that you have lost the wetlands, the republic property out there, will not be costed, it will not be seen as a depreciation of your assets, because the wetland is lost and the wetland was supplying lots and lots of services, birds and bees, and water. There’s a huge amount of services that a wetland does and I needn’t innumerate that here. But that loss will not be counted against the project.

More here.