Can we dismiss this `economists only care about GDP’ crap, once and for all?

Yesterday, the Pembina Institute and Equiterre released a report entitled Booms, busts, and bitumen: The economic implications of Canadian oil sands development.   The report opens with a foreword from University of Ottawa economics professor Serge Coulombe. His opening paragraph states that, “Environmentalists don’t accept gross domestic product (GDP) as a complete measure of well-being in the same way that economists do.”  This statement is astounding for its ignorance of the discipline, not to mention the irony of it having been written by an economist. Worse, it validates a trend among the environmental movement in Canada, spearheaded by David Suzuki, to dismiss economists as the enemy of the environment. I don’t know of a single economist who thinks this way.  We may disagree on the relative values of environmental amenities but I can’t think of anyone who would argue that they have zero impact on welfare or that GDP is the only relevant measure of well-being.

David Suzuki often talks about the Economics 101 course he took which ignored externalities. That certainly didn’t match with my recollection – the second half of my microeconomics 101 course was all about market failures due to monopoly, incomplete information, public goods, or environmental pollution.

If you look at Greg Mankiw’s Principles of Economics, likely the most widely used introductory text, you don’t even get to discussions of GDP until page 491 in the Sixth Edition. Externalities are covered over 200 pages earlier, on page 195. When you get to talking about GDP, there is a muti-page section which begins, “GDP is not, however, a perfect measure of wellbeing…” The section goes on to discuss things such as the value of leisure, the costs of pollution, the value of home production, etc.

On the environment, Mankiw writes that, “another thing that GDP excludes is the quality of the environment. Imagine that the government eliminated all environmental regulations. Firms could then produce goods and services without considering the pollution they create, and GDP might rise. Yet, well-being would most likely fall. The deterioration in the quality of air and water would more than offset the gains from greater production.”

Gee, that almost sounds like something David Suzuki would write himself. David Suzuki is also a strong proponent of evidence-based policy. If you agree, you might want to read this, from Fullerton and Stavins, on how economists really think about the environment.


Update: via Dan Gardner, this piece from the New Yorker is excellent. It quotes Kuznets, who formulated the tools to measure GDP in the US, as saying that, “the welfare of a nation can…scarcely be inferred from a measurement of national income.” I guess Kuznets must have been an environmentalist, not an economist.

12 responses to “Can we dismiss this `economists only care about GDP’ crap, once and for all?”

  1. bigcitylib

    Perhaps a fair point. Do you have an opinion of anything beyond the first paragraph?

  2. Mcdermottinnyc

    Andrew –

    “Hey pot, this is kettle”

    While the statement that economists ignore externalities might have been over-reaching, you are the last person in Canada who should be providing the rebuke. Upon review of a range of your recent writings, externalities, particularly ghg emissions from thr oil sands, are not something given prominence, nor more often than not, even the courtesy of lip service.

  3. Andy Skuce

    I think that at least part of the confusion springs from the fact that many people not only know little about economics, but they don’t even know who is an economist and who is not. Businessmen, bankers, politicians and investment advisors are commonly taken for economists, both by members of the general public and, often, by themselves. In my business career,”running economics” usually meant simply doing discounted cash flow calculations, with no consideration given to what an economist would recognize as “economics”, let alone fancy stuff like unpriced externalities.

    (I am sure that you have been asked many times by people to provide them with investment advice. I doubt that you would mind as much if someone claimed that investment advisors only care about returns on investment and are oblivious of externalities.)

    I realize, in the case of the foreword to the Pembina/Equiterre report, the offending comments were written by an economics professor, who should have known better.

    A little tangentially, John Kay had a good article on DIY Economics, comparing it with DIY Physics.

    It is true that many environmentalists are too quick to dismiss standard economics and just go ahead and do it for themselves. There is some considerable frustration among them with what they see as economists’ obsession with unending economic growth and with the tyranny of discounting, which reduces the value of the future too much for their intuitive sense.

  4. mcdermottinNYC

    Andrew – the comments I make are personal in nature. In my personal account, I’m overweight energy, but underweight oil sands. I like buying companies with good management. Regretfully, like the professor who educates them, oil sands managers seem more interested in giving short rift to the GHG externalities of their product than they do engaging on the matter. Since most outside of Alberta see it differently, that approach has constrained takeaway capacity and imposed real costs — $38.42/bbl discount to WTI as of Friday’s close. And the share price reflects this with the oil sands index down 10% YTD while trailing global energy peers by over 20%.

    So the evidence is increasingly demonstrating that ignoring GHGs, treating those who talk about them with recrimination, and praying that Tinkerbell will wave her magic wand and either make climate change go away or bring some silver bullet technology to bear, is no way to risk manage and make money.

    But should management ever have an epiphany and decide to take an adult approach to the GHGs – in other words, behave like fiduciaries rather than Conservative ideologues – I’d be happy to be back on the bid. It’s a great asset (if only it could be managed better)

  5. mcdermottinNYC

    Again, my comments are personal, but out of my personal account I recently acquired and cancelled 1000 CERs and donated those reductions to Canada’s Kyoto negotiating team. Covered the equivalent of roughly 700 transatlantic return flights (700 more than zero)

  6. WJV

    It would be easier to dismiss, if there were a measure of well-being that economists promoted? Is there such a measure in Mankiw’s Book?

    Also, economists are at best neglectful of a measure like GPI (genuine progress indicator). I almost never see economics papers promote, or even publish analysis of GPI measurements (one exception is Maryland is starting too). More often economists are highly dismissive and/or critical of GPI. That doesn’t help the credibility of your thesis here.

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