Why (not) price nature?

A few remarks on today's debate on economic valuation of ecosystem services, here in Wageningen:

• Having two non-economists as the only speakers in a debate on economic valuation of ecosystem services led to the usual misconceptions of economics, some if which I will explain below.
• I have written most of what I can say about the issue in this post.
• In my three-species typology in that post, Dolf de Groot is a typical pragmatic ecologist: he literally called valuation "a necessary evil."
• The same typology might label Bram Büscher (a sociologist) a hardcore ecologist, but actually his arguments were more of a Marxist critique of economics and capitalism than of a moral nature (intrinsic value 'n all). In short his argument is that ecosystem degradation is caused by the logic of capitalism; pricing nature perpetuates that logic rather than abolishing it.
• De Groot claimed that "conventional economists ignore most externalities, like ecosystem degradation." As a conventional environmental economist, who has been working on nothing else for the past ten years than externalities and other market failures, and who meets hundreds of similar economists every year at the meetings of EAERE, AERE, IIFET, BIOECON, and so on, I found this very strange to hear, to put it mildly.
• Another statement by De Groot was that unlike pricing, valuing "is not about substitution." Economic valuation is ALWAYS about substitution. If you don't like the idea that people can be compensated for ecological degradation, don't do valuation. De Groot wants to have his cake and eat it too.
• It is a more general problem I have with the so-called 'ecological economists': a lot of their valuation work is poorly thought through, poorly executed, and done from a political agenda rather than out of scientific curiosity.
• Common mistakes by ecological economists are (1) not properly defining what they measure (like doing a stated preference survey among tourists to measure indirect use values); (2) aggregating values to such a scale that prices are bound to change (the most fundamental critique of Costanza et al.'s 1997 paper); (3) treating economic values like they would treat biophysical variables such as temperature or density (which are not context-dependent while economic value depends on what question you are asking).
• Büscher repeated the Suzuki fallacy that "externality" means "not part of the economic system"
• Büscher "did not have time" to propose an alternative to the capitalist system. Perhaps he should have a look at the historical alternatives to capitalism and their wonderful impact on the environment.
• Büscher quoted a Chinese philosopher (probably Sun Tzu) that "if you can get your enemy to speak your language you have won the battle" or something in that spirit. I don't agree. Economists study the rules of market allocation (property rights, taxation, and so on) to understand where such rules work and where they don't. This would suggest that our advice would always favour big business. But being market-friendly is not the same as being business-friendly.
• I'm in favour of pricing ecosystem services, but only in the context of concrete policy decisions, in a proper cost-benefit analysis that is part of a wider policy-making process that also takes into account other considerations besides economic value (such as intrinsic value, distribution of effects, and so on). Don't try to estimate the total value of the planet, as Costanza did.

My impressions of the 2013 ICES Annual Science Conference

My impressions after a week of presentations, discussions, and lots of delicious food:

• Of all the interdisciplinary conferences I've been to so far, the ICES meeting was the most scientific (read: least political, notwithstanding ICES's role as advisory body for fisheries policy), and the most constructive in its interaction with social scientists (read: economists). Besides EAERE (which I consider a disciplinary meeting) I was once at an ESEE meeting, and once at the European Congress for Conservation Biology. I had mixed feelings about those for their tendency to bash "mainstream economics" (whatever that may be) and to blur the line between science and activism. Perhaps it's because those communities have the hidden assumption that nature is best left alone by man, whereas fisheries scientists investigate, by definition, a form of interference in nature.
• Is it just me, or is there a major disconnect between textbook fisheries economics and the practice of fisheries management? Concepts we teach (notably maximum economic yield and the role of the discount rate) are nowhere to be seen - in fact, I once heard a fisheries industry representative refer to maximum economic yield as "a plaything for economists". In our teaching we hardly pay attention to the stochastic nature of fish stocks, but these days fisheries science is all about reference points and harvest control rules - which only make sense in a stochastic context.
• Economists can make big contributions to fisheries management by further strengthening how fisheries models describe human behaviour. So far those contributions were largely confined to modelling where fishers fish, but what about investments in gear, or boats? Let alone market structures, global developments (tilapia!), value chains, and policy-makers.
• Iceland is like an extreme version of Norway. Thought the Norwegian landscape was rugged? Iceland has volcanoes, and geysers! And where I thought Norwegians don't give a hoot what the rest of the world thinks of hunting and whaling, only Icelanders can serve raw whale meat and rotten shark to a crowd of foreign scientists. (And it was delicious! The whale, that is.) Neither do Icelandic pubs have qualms with playing the entire Velvet Underground & Nico, including John Cale's ear-piercing viola solo in Heroin.

Why economists argue with ecologists (4): Economics and thermodynamics

If you think environmental economists are a boring lot, look up this 1997 issue of Ecological Economics. It covers a debate between three economists on economic growth and the environment, but at times it reads like a transcript of a Jerry Springer show. On one side we have Herman Daly, one of the first ecological economists and co-founder of the journal Ecological Economics. On the other side we have Robert Solow and Joseph Stiglitz. Solow and Stiglitz are environmental economists, neoclassical economists, or mainstream economists, whatever you want to call them, although Stiglitz has lately turned into antiglobalists' favourite economist due to his criticism of globalization.

The trouble actually started twenty years earlier, when Solow and Stiglitz pointed out that when we run out of one resource, we can substitute it by another one: when we run out of oil, we switch to natural gas; when gas runs out, we switch to solar energy; and so on. Because we can always invent better and more efficient ways of meeting our needs, the economy should be able to keep on growing for the foreseeable future, or perhaps even indefinitely. Not everybody agreed, and an economist called Nicholas Georgescu-Roegen wrote a scathing rebuke where he argued that not all resources will be as easily substituted: if we run out of fish, how will we make our paella? If we run out of oxygen, what will we breathe? The idea of eternal economic growth, he argued, violated the laws of thermodynamics. To put it very crudely, these laws state that although you could convert matter into energy (which is what happens in a nuclear reactor), or energy into matter (as happens in particle accelerators), it is impossible to create energy or matter out of nothing. Georgescu-Roegen accused Solow and Stiglitz of "ignoring the difference between the real world and the Garden of Eden" and of "conjuring tricks." In the 1997 issue of Ecological Economics, Daly compares Solow to a medieval alchemist trying to turn lead into gold. You may not consider that particularly diplomatic, but Solow and Stiglitz pull no punches either. The opening sentence of Solow's article reads

Dr Daly's prose tends to dissolve at any moment into a dense cloud of righteousness. This makes it very hard to respond rationally to his performance.

Stiglitz's reaction seems somewhat friendlier, until we get to the last few sentences:

No one, to our knowledge, is proposing repealing the laws of thermodynamics! Doing so would make as little sense as the act of one state legislature that thought that students' intellectual resources could be economized by changing the value of π from the highly inconvenient 3.1416... to just 3.
In the end, we hope we have made our essential points, using somewhat fewer trees and other resources than Daly did in his 15-page note.

I will not go into all the arguments used in this debate now. There is a lot to be said about economic growth, too much in fact for one blog post. But that these people argue over the law of thermodynamics points towards another difference between ecologists and economists.

The laws of thermodynamics are central to many environmental sciences. Climate scientists include in their models the amount of heat the sun directs at the Earth, as well as the amount of heat that the Earth radiates or reflects into space: the difference is net warming, or net cooling. Biologists model animals as barrels of energy where energy goes in as food and goes out as movement and body heat: this helps biologists explain under what circumstances a species thrives and when it goes extinct. Whatever the system, if there is energy or matter coming out of it, the same amount must also be going in somewhere, or the system is either collecting or losing something. No wonder ecologists are critical of economic growth: if you produce more, it must be because you are losing something somewhere else. So how can these economists claim that we can produce ever more with ever less inputs?

Like Stiglitz says, no economist proposes to repeal the laws of thermodynamics: they govern how we can convert raw materials, energy, and labour into cars, computers, and so on. In other words, they would apply if we were talking about producing ever more stuff. But economics does not necessarily deal with stuff, but with the value of that stuff. And believe it or not: it is possible to create value out of nothing, and to make it disappear into nothing.

In fact it works a lot like information. A while ago I read a rather strange question in Intermediair, a Dutch career magazine: does a USB stick get heavier when you load it with data? The answer, of course, is no. To a computer, a USB stick is like an Etch-A-Sketch: it uses it to write things down by moving stuff around, not by adding stuff. A USB stick contains loads and loads of switches that can be either turned 'on' or 'off' (if I'm not mistaken, my 16GB USB stick has 134,217,728 of them). A computer 'reads' the information on a USB stick by observing which switches are 'on' and which ones are 'off'. Together, these switches can contain the latest Ufomammut CD, a movie of your PhD defense, or your illegal copy of Matlab. Put these files on your USB stick, and the USB stick has become a lot more valuable to you. How often do you read that some official has lost a USB stick with sensitive data? And this is all possible without changing the mass, nor the energy contained in the USB stick. (OK, to be honest, there may be some swapping of electrons between the stick and the computer, but that is negligible.) But leave it near a strong magnetic field and all your data are lost. And the USB stick has become worthless.

I sometimes get the impression that ecologists tend to treat value as they would treat the number π, or the density of some material, or the temperature of a body. Some studies measure it for a few samples and then aggregate them over the entire planet. And the folks who cite those studies seem to assume it remains unchanged over time. But value is a strange concept. Ever wonder why water is so much cheaper, yet so much more important to human life than gold? Value also varies between individuals and over time. You may not give a rat's ass for Trout Mask Replica, but there are folks out there willing to lose an eye for an original vinyl copy. Likewise, is there anyone who still listens to The Sweet? I mean, seriously?

Granted: so far economies have grown partly because we are getting more effective at extracting and using ever more inputs, and thereby producing ever more stuff. This is something we cannot keep doing indefinitely: resources are finite, the amount of solar energy our planet receives is finite. There is only so much stuff you can produce, period.

But economies also grow by producing more value with the same inputs, by tayloring products to people's wishes ever more precisely, or by enhancing the efficiency of production. How long we can keep that up is lot more difficult to say.

Ecological Economics must be economizing on language editors

How else can you explain the publication of a paper with the title

Economical sustainability of pinestraw raking in slash pine stands in the southeastern United States

Economical? As in the meaning of "thrifty"? What on Earth is "thrifty sustainability"?

I can forgive my students, especially non-economists, making this mistake, and as a non-native English speaker I understand the confusion between "economy" and "economics", the Dutch translation of which is "economie" in both cases. But I wouldn't expect such a mistake in the title of a paper in an international peer-reviewed journal that has "economics" in the name.

I know I'm being a bit of a language nazi here, but the point is also that Ecological Economics has a strange position in the environmental economics literature. The quality of the publications varies wildly between highly influential and original ideas on one hand, and vague econophobic claptrap on the other. Nevertheless, its impact factor is high enough to make it an A-journal. Perhaps that is why I have so far submitted most of my papers to that journal.