Economy And Environment, The Relationship Between

Oleh Googelio

September 18, 2013

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The Relationship Between Economy And Environment. Market cannot resolve environmental problems and that a need to find a solution.

In the late 1960s and early 1970s, a powerful social movement emerged in affluent countries arguing that economic growth caused environmental decline and could not be sustained forever. 

One of the most famous of the thousands of studies written on this issue was the book, The Limits to Growth, published in 1972 by Meadows and a team of scientists, environmentalists, economists and industrialists at the USA's Massachusett's Institute of Technology. It used a computer model of the world economy to show that the existing population and economic activity growth rates could not continue indefinitely on a planet that had limited resources and limited ability to deal with pollution.

But critics argued that even if notional limits were identifiable they could be extended through scientific and technological innovation and that economic growth was necessary to finance and motivate such innovation. The focus of early limits to growth writings on the depletion of resources such as oil and minerals, left them particularly open to this criticism and the lack of global shortages in subsequent years served more than anything else to discredit their arguments.

However, the limits to growth advocates also neglected to consider the social implications of no-growth policies and the social imperatives behind economic growth. Economic growth provided increasing living standards for many people in affluent countries and it was seen to be necessary to provide similar benefits for the remaining poor in those countries and for the populations of developing nations. 

Those who argued for limits to growth were accused of being elitist and of emphasising the environment at the expense of the quality of human life. Many did not differentiate between economic growth in affluent countries and economic growth in developing countries. Nor did they recognise that population growth in affluent countries could be far more environmentally damaging than population growth in poorer countries where resource use per person was low. 

Sustainable development seeks to make the competing goals of economic growth and environmental protection compatible. Is this possible? And does it represent an eclipse of the ethical and political dimensions of environmental problems by economic interests and priorities?

Are They Partners?

The renewed interest in sustainability in the 1980s moved away from the original conception that economic growth cannot be sustainable to a new formulation which seeks to find ways of making it so. The limits-to-growth model has been replaced with the sustainable development model, and the  'gloom and doom' scenario has been replaced with 'win-win' solutions.

The changed use of the term  'sustainability' in itself indicates the differences between this wave of environmentalism and the earlier one. Earlier environmentalists had used the term to refer to systems in equilibrium: They argued that exponential growth was not sustainable, in the sense that it could not be continued forever because the planet was finite and there were limits to growth. In contrast, sustainable development seeks ways to make economic growth sustainable, mainly through technological change.

In 1982, the British Government began using the term 'sustainability' to refer to sustainable economic expansion rather than the sustainable use of resources. In the mid-1980s the World Commission on Environment and Development popularised the term 'sustainable development' in its Brundtland Report (1990). The Commission defined sustainable development as: 'Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.' In October 1987, the goal of sustainable development was largely accepted by the governments of 100 nations and approved by the UN General Assembly.

Sustainable development recognises that economic growth can harm the environment but argues that it does not need to. This new formulation of the term 'sustainability' still offends more radical environmentalists, such as Mohamed Idris :

"The term 'sustainable' from the ecological point of view means the maintenance of the integrity of the ecology. It means a harmonious relation between humanity and nature, that is, harmony in the interaction between individual human beings and in their interaction with natural resources."

The term 'sustainable' from the point of view of non-ecological elites means 'how to continue to sustain the supply of raw materials when the existing sources of raw materials run out'. (1990, p. 16)

However, for more conservative environmentalists and for economists, politicians, business people and others, the concept of sustainable development offers the opportunity to overcome previous differences and conflicts, and to work together towards achieving common goals rather than confronting each other over whether economic growth should be encouraged or discouraged.

Economic Growth And What It's Supposed To Be

One of the most pressing arguments for continued economic growth, is that it is necessary to meet the needs of poor people. Jim MacNeill, the secretary-general to the Brundtland Commission, argues that:

The most urgent imperative of the next few decades is further rapid growth. A fivefold to tenfold increase in economic activity would be required over the next 50 years in order to meet the needs and aspirations of a burgeoning world population, as well as to begin to reduce mass poverty. If such poverty is not reduced significantly and soon, there really is no way to stop the accelerating decline in the planet's stocks of basic capital: its forests, soils, species, fisheries, waters and atmosphere. " (1989, p. 106)

The Brundtland Report also argued that economic growth was necessary for poorer nations to meet their needs but used this argument to support economic growth in all nations. This argument is based on the idea that if the whole pie were bigger then each person's share would be larger and even the smallest portions would be adequate to meet a person's needs. 

The need for a growing pie avoids facing up to the ethical questions about how the pie is distributed. If the pie is not growing then either some people will remain in poverty or others will have to give up some of their share to them. As William Rees has said: 'economic growth is a major instrument of social policy. By sustaining hope for improvement, it relieves the pressure for policies aimed at more equitable distribution of wealth.' (1990, p.18)

However, economic growth does not necessarily eliminate poverty. The economic growth that has occurred worldwide over the last 20 years has not decreased the poverty in many developing nations; and the richest nations in the world still accommodate some of the poorest people. Such poverty results from distributional problems rather than from a nation's lack of wealth. Although the world's economy has grown 5 times since 1950 there are arguably more people in absolute poverty today than there were then.

Yet the Brundtland Report, and much of the government policy-making that followed, have unashamedly used the needs of the poorest to argue for economic growth in even the most affluent countries. It could be quite easily demonstrated that these affluent nations already have economies large enough to maintain all their citizens in comfort and have been able to do so for 20 years or more. Barkley and Seckler had this to say in 1972:

The more developed nations of the world have now reached a state where all reasonable and rational demands for economic goods have been or can be satisfied. As a result, the virtues of added economic growth may be an illusion because growth does not come free. In fact, the costs of added growth are climbing quite rapidly as the pressures against certain resources, and on the environment as a whole, increase. The developed countries may have reached a level at which the costs of additional growth in terms of labor and loss of environmental quality exceeds the benefits ..."( p. 18)

Environmentalists Winin Pereira and Jeremy Seabrook (1991) also dispute the idea that high living standards, which they define as 'the widespread consumption of large volumes of goods and services,' can be sustained. No matter how much recycling and reuse occurs, the energy component in all manufactured goods and services cannot be recycled and inevitably creates pollution. 

They say: 'Economic growth can be made compatible with environmental enhancement only if the emission of pollution is less than that which can be assimilated and transformed by the natural environment. In order that resources may be conserved, all articles must be manufactured so as to be fully recyclable. Further, they must be manufactured, transported, used, and recycled with energy from renewable sources only.' (p. 2)

However, complete recycling is not possible, since some materials are always lost through wear and tear, and corrosion. Moreover, Trainer claims that even if pollution generated by manufacturing could be cut by 30 percent, while manufacturing grew at 3 percent per year, the gains would be lost in 13 years -- and there would be twice as much pollution as we started with in 23 years' time. At this rate of growth (3 percent), Australia would be producing eight times as many goods in 2050 as it is now.

Limits to growth advocates argued that economic growth in general needed to be curbed whilst sustainable developers argue that economic growth should continue everywhere. What neither advocates nor opponents of economic growth seem to recognise is that economic growth in a particular country can be beneficial up to a point, beyond which the disadvantages begin outweighing the advantages.

The problem is not only recognizing when the optimal point has been reached but also in finding alternative ways to satisfy the desirable goals of economic growth, such as elimination of poverty. While there needs to be growth in some areas (such as solar technology) and in some nations, two key questions need to be asked (Trainer, 1994):

• Which specific things need developing?
• What would constitute sufficient development? 

Unless we move beyond the rhetoric of sustainable development that maintains that we need economic growth for the sake of the poor, to a more honest appraisal of what development is indeed sustainable and equitable and what development should be foregone, then the environment will indeed decline beyond the point of no return and few will be better off.

One obstacle to this is that countries like Australia have built up a momentum after 200 years of cultural development aimed at economic growth. Certain people have risen to power and influence because of their ability to facilitate economic growth and naturally they want to keep going. Many have a vested interest in the way things are and few know how they could be different.

Another obstacle is that because all nations are part of an international economic system, there is limited scope for individual nations to act independently. Most nations are dependent on loans from international banking institutions and need to export increasing amounts of goods in order to pay the interest on their loans. 

Nations compete for markets for their goods and are concerned that a static economy will fail to provide the motivation for investment, innovation and increasing productivity necessary to keep the prices of their goods down and the quality up. All this global economic activity, made compulsive by a competitive imperative, inevitably imposes a severe toll on the global environment.

Incorporating the Environment into the Economic System

The sustainable development approach claims to be able to avoid the environmental degradation that has previously accompanied economic growth by integrating economic and environmental decisions. For most governments this means incorporating the environment into the economic system.

David Pearce and his colleagues, in their report on sustainable development to Margaret Thatcher, then British Prime Minister, said that the principles of sustainable development meant recognizing that 'resources and environments serve economic functions and have positive economic value.'(1989, p.5) As a component of the economic system, the environment is seen to provide raw materials for production and to be a receptacle for its wastes.

D.J.Thampapillai says in his text on Environmental Economics;

Clearly, the natural environment is an important component of the economic system, and without the natural environment the economic system would not be able to function. Hence, we need to treat the natural environment in the same way as we treat labour and capital; that is, as an asset and a resource."(1991, p.5)

Economists are interested in the environment to the extent it can ensure a continuous supply of goods and services to meet human wants and this seems to be the intent of the Brundtland Commission's definition of sustainable development, which makes no specific mention of the environment: 'development that meets the needs of the present without compromising the ability of future generations to meet their own needs.' 

When viewed in this way, as a source of inputs and a sink for outputs of the economic system, the environment is not an equal partner. Environmental protection moves to a secondary and indeed supplementary position with respect to economic goals. Sustainability becomes a problem of how to sustain the economic functions of the environment rather than how to sustain the environment.

In theory economic growth might be achieved without additional impacts on the environment but this would mean many activities with economic growth potential would have to be foregone and this will not happen whilst top priority is given to achieving economic growth. The incorporation of the environment into the economic system ensures that it will only be protected to the extent necessary to ensure it is able to continue to supply goods and services to the economic system.

Sustainable development therefore represents a willingness to put up with a declining environmental amenity so long as human welfare in total is being enhanced. It recognises the need for balances and trade-offs. When the inevitable conflicts arise in particular instances, the environment will only be protected where the economic costs are not perceived to be too high.

The Australian Government, in its 1990 discussion paper on sustainable development, argued for example that;

"It is necessary to evaluate the risk to future economic prospects if business investment and growth is prevented or discouraged. In some cases it may be worthwhile paying the price of some environmental damage to ensure present and future economic benefits. This will be particularly relevant in commercial development of non-renewable resources, where at least some transient impact on the environment is inevitable." (Commonwealth Government, 1990, p.9).

In deciding what parts of the environment should be sacrificed environmental economists attempt to place a monetary value on the environment.

The Environment And The Price

Environmental economists argue that environmental degradation has resulted from the failure of the market system to put any value on the environment, even though the environment serves economic functions and provides economic and other benefits. It is argued that, because environmental assets are free or under-priced, they tend to be overused and abused, resulting in environmental damage. Because they are not owned and do not have price tags then there is no incentive to protect them.

The solution offered is to put a price on the environment so that it can be incorporated into the economic system and taken seriously by those who make decisions. Environmental values will then be integrated into economic decisions, market failures will be repaired and sustainable development assured. Cost-benefit analysis or CBA is one of the key ways in which environmental values are incorporated into economic activities. Another is through economic instruments. Economic instruments include taxes and charges on polluters that aim to internalise environmental costs into the decisions of companies and individuals and therefore provide an incentive to curtail environmentally damaging behaviour.

The measurement of environmental gains and losses is assessed in money terms. Direct costs and benefits are the easiest to estimate. These might include estimating the value of production foregone because of environmental damage, the value of earnings lost through health problems associated with air and water pollution, health care costs, and the value of decreased growth and quality of crops because of soil degradation.

These direct monetary costs tend to underestimate the full costs and benefits provided by the environment. For example, improved health resulting from a cleaner and safer environment is worth more than just the medical bills saved. Similarly, a clean beach is worth more than the just the value of having healthier beach goers. Economists attempt to measure these additional dimensions by considering the preferences of individuals for things like cleaner air and water, less noise and protection of wildlife. This is done in various ways (Beder, 1996, chapter 7). 

The most popular is Willingness to Pay or Contingent Valuation Market demand may be derived from surveys to find out how much people are willing to pay to preserve or improve the environment, how much they will pay to visit a particular environment, or how much compensation a person is willing to accept for loss of environmental amenity ('willingness to sell'). Both methods, 'willingness to pay' and 'willingness to sell' have problems because they are based on surveys which are likely to be inaccurate because people may inflate or deflate the amounts they are willing to pay or accept. 

The concept of willingness to pay assumes that the environment does not already belong to the community, but that they must buy it. Willingness to sell, on the other hand, assumes the environment belongs to the community and they must be compensated for any losses. However, economists tend to prefer willingness to pay because willingness to sell surveys 'tend to generate very high dollar values, to the point where many people find them implausible' (Streeting and Hamilton, 1991; 76).

A major problem with valuing the environment according to individual willingness to pay is that the preferences of future generations (and indeed other species) are not taken into account. For this reason, the market value might not be consistent with long-term welfare or survival. Individuals might prefer to continue adding to the greenhouse emissions rather than cutback on energy use even though this might  threaten future generations.

Bryan Norton, Professor of Philosophy, argues that placing of dollar values on species so that they might be weighed against such things as 'the value of real estate around reservoirs and kilowatt-hours of hydroelectric power' is inappropriate because biodiversity is necessary for survival (1988, p. 204). He compares such reasoning to hospital administrators trying to work out which parts of a life-support system can be disconnected and sold to raise money for the hospital. They do not really know which part is necessary for the continued operation of the support system, and guess which parts will not be missed.

The Ethics and Politics of Pricing the Environment

For many people, not just environmentalists, putting a price on nature is as abhorrent as putting a price on family and friendship. It represents the further creep of the market and economics into areas of life that have traditionally been considered above material concerns. Like the packaging and marketing of religion and body organs, it is somehow unsavoury and definitely unwelcome. The usefulness of economic theory can be pushed too far.

Herman Daly and John Cobb (1989) note that resource economists have found people are often reluctant to co-operate with contingent valuation surveys. They quote a researcher who argues that 'respondents believe that environmental policy - for example, the degree of pollution permitted in national parks - involves ethical, cultural, and aesthetic questions over which society must deliberate on the merits, and that this has nothing to do with pricing the satisfaction of preferences at the margin' (p. 91).

While many economists argue that the market is democratic because individual consumers can vote by choosing how they spend their money, the move towards a market allocation of environmental resources is in reality a move away from democracy. Currently, communities can influence governments to protect the environment through legislation and intervention by campaigning and demonstrating as well as by voting. But in a system where the optimum level of environmental protection is decided by a market, influence is wielded by the wealthy—those with most market power. Where economic instruments are used, private firms can choose to pay the charge and continue to damage the environment.   

The political process has traditionally determined environmental questions. Some economists and bureaucrats want to avoid this process because they argue it is economically inefficient. They claim that markets are more efficient at giving people what they want than governments but this assumes that there is no such thing as the common good outside of individual wants and preferences. However, Peter Self, a professor of public administration, argues that:

Economic markets follow an instrumental logic whereby, under the right conditions, rational egoistic behaviour is socially legitimated and acceptable -- In politics, by contrast, it is or was a general social belief that individuals should have some regard to the 'good of society' and not just their own private wants." (Self 1990, p. 9)

Humans are first and foremost social animals and although their personal spending may reflect their individual self-interests, their participation in the political process through voting, demonstrating and lobbying often reflects broader and more long-term communal values.

Moreover economic efficiency does not necessarily equate with social or environmental welfare. Just because the benefits of an action outweigh the costs, it does not mean that the decision is morally correct or politically acceptable. For example, child labour or slavery would be considered immoral even if the economic advantages to the whole society outweighed the costs to some individuals. Pricing mechanisms and markets tend to ignore distributional issues such as who gets the benefits and who bears the costs. As long as the sum of the benefits outweigh the sum of the costs, even if a small group of people get the benefits and a whole community suffers the costs, economists assume the society as a whole is better off.

There is an exacerbating tendency in our society for poor people to be the ones that suffer the costs of hazardous, dirty or unwelcome developments. Siting a dirty industry in an already dirty area will be less costly than siting it in a low-pollution area because the costs of pollution, if measured in terms of decline in property values will be lower. Similarly, siting the polluting industry in an area that already has depressed property values, will also be less costly by this method than siting it in an affluent area. In this way the poor are continually disadvantaged by market-driven environmental choices.  Because it is based on individual preferences, environmental valuation tends to reflect and therefore maintain the prevailing distribution of income. Wealthier people are willing and able to pay more and therefore their votes count more in a market.

When market-based approaches to the environment are allowed to by-pass the political process they perpetuate the root causes of environmental degradation because the environment is simply treated as an adjunct to production.  Attempts to assign dollar values to segments of the environment are ways of reaffirming the market as the primary social decision-making mechanism - a mechanism that relies on individual self-interest to achieve maximum social welfare.

It does not occur to us that by assigning value to diversity we merely legitimize the process that is wiping it out, the process that says, 'The first thing that matters in any important decision is the tangible magnitude of the dollar costs and benefits'....  if we persist in this crusade to determine value where value ought to be evident, we will be left with nothing but our greed when the dust finally settles."(Ehrenfield,1988, p. 213)

Conclusion

Both the Limits to Growth approach and the Sustainable Development approach have neglected the ethical and political dimensions. The limits to growth advocates of the 1960s and 70s tended to avoid the social implications of aborting economic growth in low-income countries and the issue of which nations were responsible for most resource use.  The sustainable development advocates of the present similarly want to avoid the ethical issues by falling back on economic calculus to make decisions as if values can be determined by doing the sums correctly. They also avoid the distributional issues by advocating economic growth for all in the hope that this will solve the problem of equity.

On top of this the sustainable development approach makes further environmental degradation inevitable. It is apparent there is a need to go beyond these two failed approaches and find a third one which embraces the ethical dimension. This will involve getting beyond the current preoccupation of governments with economic growth as the overriding priority for all nations at all times. Our endeavours need to be focused on new ways of achieving a reasonable level of comfort in all nations, without the environmental damage normally associated with economic development.

We need to find ways of ensuring the fruits of this development are more evenly distributed within populations. This cannot be done if decision-making is based on the premise that any development that provides a net monetary benefit to a nation should be approved. Even if the calculation of the benefit incorporates measures of environmental damage, environmental amenity is likely to decline and equity issues will still be ignored. We need new forms of social decision-making that integrate the ethical dimension - neither limits to growth nor sustainable development offer the answers.

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