maandag 27 mei 2013

Why economists argue with ecologists (6): Can we price nature?

Can we express nature's value in currency, such as dollars, euros, or yuan? I usually get one of the following three replies to this question.

The first is the hardcore ecologist:
"Most certainly not. Nature has a value in itself. Pricing nature is disrespectful to nature; it violates nature's intrinsic value; it's cynical and perhaps even blasphemous. Can't we just enjoy something without putting a price tag on it? Why does everything have to be expressed in money?"

The second is the hardcore economist:
"Well, duh. People have preferences. Do you prefer an apple or an orange? Do you prefer a highway or a forest? From preference orderings we can derive the amount of compensation people would need for building that highway. So of course we can price nature. We do it every time we make a choice between nature and something else."

The third is the pragmatic ecologist:
"I don't like it, but if we don't do it policy makers won't listen to us. Economists rule the world, so to promote nature conservation we need to speak the language of economists, and that is money. So I'll just hold my nose and price nature. But I will also remind people that the price tag does not mean that nature can be substituted for something else."

Believe it or not, but my view is closer to the hardcore ecologist than any of the other two. So what am I doing teaching monetary valuation of the environment next June?

When we do monetary valuation of, say, a coral reef, we don't value a coral reef. Does my wage say how much I am worth as a human being? (Boy, am I glad I never pursued that career in Dutch folk music.) No, at best it gives an indication of the value of the skills and expertise I am offering in the labor market as a teacher and researcher. Likewise, coral reef valuation aims to estimate the economic value of the goods and services provided by a coral reef, like diving tourism, coastal protection, or nursing juvenile fish. By "economic value" I mean how badly we want or need those goods and services, and how easy it would be to get them elsewhere if the coral reef disappears. That tension between how badly we want something and how easily we can get it is also called relative scarcity. Water is not scarce in The Netherlands, even though it is an essential resource. The fact that it is so easy to get makes that it has a very low market price. On the other hand, diamonds are hugely expensive, not because we need them so badly but because they are so difficult to come by. You rarely see newspaper headlines about the scarcity of people, but there is common mention of scarcity of skills or labor. The last time we put price tags on humans was during the shameful era of the slave trade. Likewise, monetary valuation does not, and should not, even pretend to price nature as such.

This view puts me at odds with the hardcore economist who argues that ethics can be fit in preference orderings and compensated for. I don't agree with this line of reasoning. It would imply that one person can block a policy if he finds it absolutely unacceptable - after all, he would require an infinite amount of compensation in order to be left "as well off" as without the policy. In practice we would call him a protest bidder and remove his data point from our analysis. Another problem is that this line of reasoning assumes that moral objections are purely individual. Moral considerations, however, typically pretend to hold for everybody. If I think eating meat is wrong, I can allow you to order a hamburger while still condemning it. If it were a purely individual preference, for instance if I would have no quarrels with eating meat but I simply don't like hamburgers, I would have no reason to condemn your ordering of a hamburger. So when we talk about the intrinsic value of a coral reef or a species, we have no other option but to debate it with others. The outcome of that debate may be that the majority dismisses the idea of an intrinsic value of a coral reef. But at least the argument would have its proper place in the political process, which it would not have if we tried to express it in a monetary value.

It also puts me at odds with the pragmatic ecologist. First, I find his line of reasoning insincere. If you think coral reefs are unique, unsubstitutable, and should be preserved for their own worth, just say so and don't start using economic value as an argument of convenience. Second, economic value implies substitutability, period. If I compensate you for the loss of an environmental asset, I substitute the environmental asset by something that makes you just as well off as with the asset. So I have substituted the asset by something of similar value to you. If I cannot substitute the asset by all the wealth in the universe, then its value must be infinite: hence Michael Toman's characterization of Costanza's $33 trillion paper as "a serious underestimate of infinity". Third, valuation should be done sincerely, and with the prime goal to make sure that all relevant information is available for public decisions. If you blur the line between moral considerations and purely economic ones, you will be tempted to overstate the economic arguments because the moral ones didn't work.

The bottom line is that when you do economic valuation, you need to define very precisely what it is you are measuring, and whether the methods you use answer the question you ask. I am deeply skeptical of measuring such notions as existence value (an economic value derived from no more than knowing something exists), because I doubt whether people understand the concept, and whether we will ever be able to distinguish it from moral considerations. But perhaps that is what the role of economists should be in this issue: to properly phrase the question, to explicitly lay out the arguments and considerations, and to quantify those considerations that can be quantified.

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