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The Dismal Science

As the old joke goes, there are three kinds of economists; those who can count and those who can’t. This and worse give a picture of a profession that is not generally held in high esteem. Expert predictions made about economic growth, inflation or any number of other indicators vary considerably between teams, and who actually turns out to be right seems more a matter of luck than judgement.

Many people assume that economics is described as ‘dismal’ because of its association with the quantification of human misery. The origin of the term is correctly ascribed to Thomas Carlyle, but the coining was not in response to the doom mongering of Malthus, as is commonly supposed. In reality, Carlyle first used the term because economic arguments did not provide support for his arguments on the need for slavery in the West Indies (Why economics is really called ‘the dismal science’).

But, for all that, the essence of economics is extremely valuable: it addresses the issue of what is a fair value for a given product or service. Human behaviour is governed to a large extent by what we perceive as value for money and, at least for non-essential items, there is a tendency to buy items which are not necessarily the cheapest but which offer the best value in our eyes. But not everyone makes the same choices.

In the busy and important technology market – particularly mobile phones – there are plenty of people who want to have the latest, most sophisticated model. This is how companies such as Apple or Samsung compete, by launching updated models and fighting for the top end of the market. At the same time, earlier models are still available, for those who want an smartphone but aren’t too bothered about the latest bells and whistles.

As the market matures, so it segments. There is a growing market for modestly-priced Android phones which perform more than adequately but don’t have the full capability or cutting-edge design of the latest models. There are also still plenty of people for whom a mobile phone is simply there to make and receive calls or send texts and who don’t yet have a smartphone. So, there’s a whole spectrum of sub-sectors, from basic phones to sophisticated mobile computers through which users can channel a vast range of digital services previous generations could only dream of.

The point is that there is a wide range of human response to the availability of a product which they never knew they needed. People also make decisions on a daily basis about other items, from food to footwear. It depends on their resources, tastes and, for many items, the message their possession gives to the rest of society. Why else would people buy a Rolex, a Rolls Royce or a Hermes handbag other than to show they can afford it?

Using economics is problematic enough when dealing with groups of individuals, but it does at least pose the right questions about the perception of value and willingness to pay for non-essential items. Applying the same principles to environmental issues is even more fraught with difficulties.

The idea of assigning values to elements of the natural world is a perfectly reasonable one. It’s much easier to justify taking action to protect a forest or coral reef when it has a nominal monetary value, rather than just treating it as self-evidently necessary (even if, at heart, this is often as much an ethical argument as an economic one).

Some may find putting a value on everything distasteful, but the advantage is that this gives a common baseline to make comparisons. If a particular conservation project is expected to cost ten million euros, for example, it is much easier to decide to go ahead if the value of what is conserved turns out to be double that.

The problem is that, whereas a Rolex or a smartphone has a market value set so that the supplier makes an adequate return, environmental goods are not traded. People buy woodland, for sure, but environmental economics is interested in whether or not the trees are felled rather than who owns them.

So we are left with a range of proxy measures of value. Some are relatively straightforward. For example, if a certain fish population is in steep decline because of overfishing, conservation measures are likely to be justified in terms of protecting the future livelihood of fishermen. But at the other end of the spectrum comes the valuation of intrinsic worth of a particular habitat by asking people for their willingness to pay to retain it. Conserving a wilderness may be worthwhile just because of the tourism associated with it, the value of which can be estimated, but simply asking people at a distance what they would theoretically be willing to pay for conservation seems like too much of an academic exercise to have much real value.

Between these extremes, we have other factors which are valued on the basis of a range of rather heroic assumptions. Take forest clearance. Ignoring other aspects, this is regarded as a bad thing because it releases carbon from the soil as methane. On the other hand, unless the wood is burnt, the carbon it contains remains locked up in things such as furniture or floorboards. And if the land is replanted with young trees, their rate of growth and uptake of atmospheric CO2 can be quite rapid and extend for decades.

Depending on the timescale we consider, felling an area of forest could be seen as negative, neutral or positive in terms of greenhouse gas emissions. Indeed, the burning of wood to generate electricity is being subsidised on the basis of its supposedly carbon-neutrality, even though the short term effect is to increase emissions.

This complexity is compounded by trying to put a value on the methane emitted, based on assumptions about the damage done to the environment and human society by raised levels of carbon dioxide in the air (themselves based on flawed models of global climate systems). And yet it is this kind of economic argument that Lord Stern and others are using to justify massive expenditure on emissions reduction now to reduce the possibility of damaging global warming many years hence. This is compounded yet further by the need to use effectively a zero discount rate – so valuing the needs of future generations higher than our own – in order to get the desired answer. Dismal science indeed. There is a case which can be made for emissions reduction without resorting to economic sleight of hand to justify it.

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The Scientific Alliance is pleased to publish and analyis of the intermittency of UK wind energy generation for 2013-14 by Derek Partington