The Price Ain’t Right

Cover photo from Mother Nature Network (www.mmn.com)

Eric Miller, Alternatives Journal, 43:3/4 (2018) is posted with permission.

When I was working on my biology degree, I enrolled in Economics 101 as an elective. Of all possible electives, economics seemed relevant to my interest in conservation biology and ecology. I was one of an estimated 40% of undergraduate students who enrol in an economics course.

My conservation biology textbook had a chapter on economics. Yet my economics textbook of 500 pages had just two paragraphs dealing with natural resources and the environment. Twenty years later, I am still shocked by what the text had to say:

“The conversion of urban transportation systems from horses to internal combustion engines has eliminated most of the pollution associated with transportation”. This statement in the textbook was supported by a footnote that simply read “Think about it for a minute”.

Conventional “wisdom” downplays the economic significance of environmental issues. In the words of my textbook, a concern about exponential growth in the use of a fixed stock of resources “seems more of a concern for a course in astrophysics, or perhaps theology, than for a course in economics.”

Photo Source: Gund Institute for Ecological Economics

Despite the arrogance of my textbook, I persisted with my interest in the economics of environmental issues. Today I am economist, specializing in environmental issues. I inform students, governments, businesses, and think-tanks about how to integrate considerations of ecology and economics when solving real-world problems. I am part of a Canadian and global community that practices ecological economics.

Ecological economists are interested in broadening ecological economic literacy. To do this, we educate non-economists, and re-educate conventional economists.

If all of the students in my Economics 101 course were to be re-educated, I would start by addressing the textbook’s claim that “the economy is protected from resource-depletion disasters” by market-determined prices. “As specific resources come into short supply, their prices rise, leading producers to shift towards substitutes”.

In theory, the price of specific things, which are traded in free markets, will rise when they become scarcer. In turn, rising prices can increase the amount of conservation, substitutions, and new supplies being made available. Unfortunately, Economics 101 universalizes this theory, whereas it should contextualize it.

In fact, this theory only applies to market goods that can be bought and sold as commodities. But most of nature cannot be commodified as market goods. Most of nature’s provisions are public goods and common-pool resources. Free markets fail to reward the supply of public goods, and free markets accelerate the depletion of common-pool resources. Therefore we cannot rely upon freely-determined prices of nature as an indicator of its economic scarcity.

As one example, consider the growing scarcity of ecosystem services which was revealed globally by the Millennium Ecosystem Assessment, and in Canada by the Ecosystem Status and Trends Report. Ecosystem services are the benefits that flow directly to humans from nature, without being sellable as commodities, so they are not priced. Since ecosystem services are not priced, we cannot rely upon changes in its price as an indicator of changes in its economic scarcity. Ecosystem services will remain unpriced even as they come scarcer through depleted or over-use.

We should also be mindful that the production, use, and disposal of market goods relies upon nature’s unpriced services. Therefore even the prices of market goods will fail to incorporate related environmental scarcities.

For this reason, ecological economists have developed other measures for understanding environmental scarcities. Some measures improve upon existing prices, while other measures do not use prices.

These new measures, and new ways of analyzing their data, will likely be unknown to anyone who was trained in Economics 101. Hence the need for economics education, and the re-education of economists.

Eric Miller is a consulting economist based in Hamilton, Ontario.

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