Eco-nomics: Truth or Consequences by Al Gore

Eco-nomics: Truth or Consequences by Al Gore, ( Just need to answer the questions at the end ).Free market capitalist economics is arguable the most powerful tool ever used by civilization. As a system for allocating resources, labor, finance, and taxation, for determining the production, distribution, and consumption of wealth, and for directing decisions about virtually every aspect of our lives together, classical economics reigns supreme. Its laws are so pervasive that we take them largely for granted, like the laws of motion and gravity – which, incidentally, were codified by Sir Isaac Newton at the beginning of the Scientific Revolution, only a few decades before Adam Smith codified the major principles that still underlie economics today.The hard truth is that our economic system is partially blind. It “sees” some things and not others. It carefully measures and keeps track of the value of those things most important to buyers and sellers, such as food, clothing, manufactured goods, work, and indeed, money itself. But its intricate calculations often completely ignore the value of other things that are harder to buy and sell: fresh water, clean air, the beauty of the mountains, the rich diversity of life in the forest, just to name a few. In fact, the partial blindness of our current economic system is the single most powerful force behind what seem to be irrational decisions about the global environment.Fortunately, these shortcomings can be fixed – albeit with great difficulty. The first step is recognizing that economics, like any took, distorts our relationship with the world even as it gives us impressive new powers. Because we come to rely so completely o the capabilities conferred by our economic system, we adapt our thinking to its contours and begin to assume that our economic theory can provide a comprehensive analysis of whatever we with it to interpret.However, just as our eyes fail to see all but a narrow portion of the light spectrum, our economics fails to see – let alone measure – the full value of major parts of our world. Indeed, what we do see and measure is a very thin band within the full spectrum of the costs and benefits resulting from our economic choices. And in both cases, what is out of sight is out of mind.Much of what we don’t see with our economics involves the accelerating destruction of the environment. Many popular text books on economic theory fail even to address subjects as basic to our economic choices as pollution or the depletion of natural resources. Although these issues have been studied by many micro-economists in specific business contexts, they have generally not been integrated into economic theory. “There is no point of contact between macroeconomic and the environment,” says the World Bank economist Herman Daly, a leading student of the problem.Consider the most basic measure of a nation’s economic performance, gross national product (GNP). In calculating GNP, natural resources are not depreciated as they are used up. buildings and factories are depreciated; so are machinery and equipment, cars and trucks. So why, for instance, isn’t the topsoil in Iowa depreciated when it washes down the Mississippi river after careless agricultural methods have lessened its ability to resist wind and rain? Why isn’t that loss measured as an economic cost of the process by which our grain was produced last year? If the rate of topsoil loss is high enough in a given year, the nation may end up poorer, even when the value of the grain produced in taken into account. Meanwhile, our economic reports will assure us that to the contrary, we are richer for having frown the grain, and richer still because we didn’t spend the money required to grow it in an ecologically sound manner and thus keep the topsoil from washing away. This is now more than economic theory: largely because we failed to see the value of growing grain in an ecologically sound manner, we have lost more than half of all the topsoil in Iowa.There are thousands of other examples. Here is one: the heavy use of pesticides may ensure that the grain we grow achieves the highest possible short-term profits, but the careless and excessive use of pesticides poisons the groundwater reservoirs beneath the field. When we add up the costs and benefits of growing the grain, the loss of that freshwater resource will be ignored. And largely because we have failed t measure the economic value of clean, fresh groundwater, we have contaminated more than half of all the underground reservoirs in the United States with pesticide runoff and other poisonous residues that are virtually impossible to remove.Or take still another situation, one a little farther from home. When an underdeveloped nation cuts down a million acres of tropical rain forest in a single year, the money received from the sale of the logs is counted as part of that country’s income for the year. The wear and tear on the chain saws and logging trucks as a result of a year’s work in the rain forest will be entered on the expense side of the ledger, but the wear and tear on the forest itself will not. In fact, nowhere in the calculation o that country’s GNP will there be an entry reflecting the stark reality that a million acres of rain forest is now gone. This ought to strike anyone as alarming, if not absurd. Yet when the World Bank, the International Monetary Fund, regional development banks, and national lending authorities decide what kinds of loans and monetary assistance to give countries around the world, they base their decisions on how a loan might improve the recipients’ economic performance. And for all these institutions, the single most important measure of progress in economic performance is the movement of GNP. For all practical purposes, GNP treats the rapid and reckless destruction of the environment as a good thing!Robert Repetto, an economist at the World Resources Institute, has led a team that studied the effects of this distortion in a national income accounting on the development pattern of Indonesia. That nation’s net losses of forest resources now exceed timber harvests” so much topsoil has eroded that the net value of the timber crop has been reduced by approximately 40 percent. Yet while this economic tragedy was unfolding and Indonesia was racing toward the precipice, the official economic reports all showed a rosy picture of steady progress.Recently I asked the United Nations officials responsible for periodically revising the definition of GNP why this blindness is allowed to remain in our methods of calculation. The definition of GNP and other key yardsticks of economic performance are reviewed by the world community under the aegis of the United Nations every twenty years. And economists like Daly, Repetto, Robert Costanza of the University of Maryland, and others have long urged the changes I was recommending. The officials, who were then beginning their review procedures for this twenty-year cycle, acknowledged the good sense of these changes but claimed it would be difficult and inconvenient to make them now. “Perhaps at the next review,” they said—twenty years from now.What a striking contrast between the awesome power and efficiency our economic system displayed in its philosophical rout of Marxism-Leninism and the abject failure of the very same system to even take note of the poisoning of our water, the fouling of our air, the destruction of tens of thousands of living species every year. We make billions of economic choices every day, and the consequences are bringing us steadily closer to the brink of ecological catastrophe.Classical economists like to argue that all participants in the struggle between supply and demand have “perfect information” – that everyone who makes an economic choice within this all-powerful, all-encompassing framework of calculations can safely be presumed to know all of the facts surrounding and supporting their choices, even if marginal errors of judgments are allowed. The logical extension of “perfect information” is what classical economists call the market-clearing feature of the economic system, which they also assume to be perfect. This notion is best illustrated by the famous story in which an elderly man is walking down the sidewalk with his young granddaughter when she notices a $20 bill and starts to pick it up. “No, no,” says the grandfather, stopping the little girl’s hand in midair. “If there was a $20 bill there on the sidewalk, it would already be gone. It can’t be real.”Such theories border on intellectual arrogance, especially in light of the inability of classical economics to deal with the idea of accounting for lost natural resources. Just as our current system of economics makes absurd and unrealistic assumptions about the information actually available to real people in the real world, it insists upon equally absurd assumptions that natural resources are limitless “free goods.”Accounting blindness is not limited to the valuation of products alone, however. According to the First law of Thermodynamics, neither matter nor energy can be either created or destroyed; natural resources, therefore, are transformed into both useful products, called goods, and harmful by-products, including what we sometimes call pollution. Not surprisingly, our economic system measures the efficiency of production, or “productivity,” in a way that keeps better track of the good things we produce than the bad. But every production process creates waste; why isn’t it accounted for? If a country produces huge amounts of aluminum, for example, why isn’t the calcium fluoride sludge, an inevitable by product, account for?Indeed, improvements in productivity – the single most significant measure of economic “progress”—are currently calculated by a method that embodies yet another absurd assumption: if a new technique has both good and bad consequences, it is permissible, under some circumstances, to measure only the good and simply ignore the bad. When the number of good things produced with each unit of labor, raw materials, and capital go up – usually because somebody has cleverly figured out a “better” way to perform the task at hand – then productivity is said to increase. But what if the clever new process results not only in the increased production of good things but also in an even larger increase in the number of bad things? shouldn’t that count? After all, it may cost a lot of money to deal with the consequences of the extra bad things.Classical economic also fails to account properly for all the costs associated with what we call consumption. Every time we consume something some sort of waste is created, but this fact is conveniently forgotten by classical economists. When we consume millions of tons of chlorofluorocarbons (CFCs) each year, ware they gone? If so, then what is eating the hole in the ozone layer? When we consume 14 million tons of coal each day and 64 million barrels of oil, are they gone? If so, where is all the extra carbon dioxide (CO2) in the atmosphere coming from?None of these hidden costs is accounted for properly; indeed, the way our economic system measures productivity doesn’t make sense even within the logic of the system itself. It is almost as if the ultrarational “economic man” of classical theory actually believes in magic. If our economic goods are produced from natural resources that never have to be depreciated because their supply is limitless, if the production process leaves no unwanted by-products whatsoever, and if our products disappear without a trace when they are consumed, then we are witnessing powerful magic indeed.Classical economics defines productivity narrowly and encourages us to equate gains in productivity with economic progress. But the Holy Grail of progress is so alluring that economists tend to overlook the bad side effects that often accompany improvement. The problem is, of course, they almost always go together, and wisdom requires balancing the good against the bad to determine whether the overall result is positive or negative. If we measure the value f what we do and consistently ignore important side effects, we will continue to set ourselves up for nasty surprises. When a “new” environmental catastrophe is discovered, for instance, we can often look back and see an accumulation of thousands of seemingly defensible but poorly thought-out decisions, all made according to criteria that do not themselves make any sense when all of the costs and risks are balanced against the benefits. Why weren’t these consequences considered ahead of time? The answer lies in our economic system’s ability to conceal the ill effects of many choices by resorting to an intellectual device labeled “externalities.”The bad things economists want to ignore while they measure the good things are often said to be too difficult to integrate into their calculations. After all, the bad things usually cannot be sold to anyone, and the responsibility for dealing with their consequences can often be quietly pushed on to someone else. Therefore, since the effort to keep track of the bad things would complicate the valuation of the good things, the bad things are simply defined away as external to the process and called externalities.This habit of using an arbitrary definition to exclude inconvenient facts from the calculation of what is good and what is bad is a form of dishonestly. Philosophically, it is similar in some ways to the moral blindness implicit in racism and anti-Semitism – which also use arbitrary definitions to justify exclusions from the calculus of right and wrong. A racist, for example, can be seen as a person who draws a circle of value around himself and those of his own race in order to exclude, by definition, those of other races. The racist then often makes choices that artificially inflate the value of those inside the circle at the expense of those outside. Frequently, there is a direct ration between the increasing value inside the circle and the decreasing value outside. Both slavery and apartheid are examples of this phenomenon at work.In much the same way, our current system of economics arbitrarily draws a circle of value around those things in our civilization we have decided to keep track of and measure. Then we discover that one of the easiest ways to artificially increase the value of things inside the circle is to do so at the expense of those things left outside the circle. And here too, a direct and perverse ration emerges: the more pollution dumped into the river, the higher the short-term profits for the polluter and his shareholders; the faster the rain forest is burned, the quicker more pasture becomes available for cattle and the faster they can be turned into hamburgers. Our failure to measure environmental externalities is a kind of economic blindness, and its consequences can be staggering. A mathematician at the University of British Columbia, Colin Clark, has said, “Much of apparent economic growth may in fact be an illusion based on a failure to account for reduction in natural capital.”Robert Repetto and others have suggested a modest change in the way we calculate productivity as a first step toward taking environmental externalities into consideration. He suggests that we carefully measure both beneficial and damaging products from any process and keep track of changes in both categories before measuring changes in productivity. For example, a coal-fired power station produces both kilowatt-hours of electricity and tons of atmospheric pollution. It is easy to evaluate the economic significance of the electricity because it is sold. But it is also possible to evaluate at least some of the economic significance of the atmospheric emissions. Sulfur oxides cause crop losses downwind from the power station, along with materials damage, visibility losses, and medical bills for the treatment of respiratory distress. A great deal of work has gone in to calculating the real cost of the effects associated with each additional ton of sulfur dioxide emissions. So far, these valuations are a lot less precise than the values established by the market for electricity. Still, that difficulty ought not to be used as a convenient excuse for asserting that the cost should be place at zero; there is a well-accepted and agreed-upon range, and some value within that range could and should be used in calculating the costs and benefits of each ton of coal burned.Coal burning power stations also provide a good illustration of a related point. When a new law like the Clean Air Act is passed, requiring a reduction in sulfur dioxides, we are told that the productivity of coal-fired power stations will go down – based on a calculation that completely ignores the savings that will result from lower expenditures to deal with the consequences of pollution every time a ton of coal is burned. Even if we changed the calculation of productivity only enough to include those economic impacts of pollution for which we already have accepted values, we would be that much closer to an accurate definition of true gains or losses.Past a certain point, however, it is impossible to put a price on the environmental effect of our economic choices. Clean air, fresh water, the sun rising through the mist on a mountain lake, an abundance of life on the land, in the air, and in the sea – the value of these things is incalculable. It would be cynical indeed to conclude that because such treasures have no price, it is reasonable to make decisions based on the assumption that they are worthless. As Oscar Wilde said, “A cynic is one who knows the price of everything and the value of nothing.”In drawing a circle of value around those things we consider important enough to measure in our economic system, we not only exclude a great deal that is important in the environment, we also discriminate against future generations. The accepted formulas of conventional economic analysis contain short-sighted and arguable illogical assumptions about what is valuable in the future as opposed to the present; specifically, the standard “discount rate” that assesses cost and benefit flows resulting from the use of development of natural resources routinely assumes that all resources belong totally to the present generation. As a result, any value that they may have to future generations is heavily “discounted” when compared to the value of using them up now or destroying them to make way for something else. The effect is to magnify the power of one generation to compromise all future generations. In the worlds of Herman Daly, “There is something fundamentally wrong in treating the earth as if it were a business in liquidation.”In 1972 the Bruntland Commission, established by the United Nations to examine the connection between economic development and protection of the environment, focused our attention on the need for “intergenerational equity” – an insistence that decisions by the present generation be made with an awareness of their impact on future generations. Although this phrase has become a fixture in the rhetoric about the environment, it is not yet reflected in the way our economic system measures the effect of our decisions in the real world. As a result, we continue to act as if it is perfectly all right to use up as many natural resources in our own lifetime as we possibly can.The current debate over sustainable development is based on the widespread recognition that many investments by major financial institutions, such as the World Bank, have stimulated economic development in the Third World by encouraging the short-term exploitation of natural resources, thus emphasizing short-term cash flow at the expense of longer-term, sustainable growth. This pattern has prevailed both because of a tendency to discount the future value of natural resources and because of a failure to properly depreciate their value as they are used up in the present.Some companies are trying to guess whether the new public awareness of the environment is temporary or permanent. Major paper mills, for example, facing around of investment in new capacity, must decide whether the current interest in recycled paper is here to stay. If so, then large investments in recycling plants will be profitable; if not, they may face serious risks in making such investments. Such prophecies often tend to be self-filling, of course. But here is where the government can play an important role—and too often has failed to do so. The Bush administration talks loudly about the tendency of a free marketplace to solve all problems. But many of our markets are highly regulated, often in hidden ways. In the case of the paper industry, for instance, tax-payers currently subsidize the manufacture of paper products mad e from virgin timber, both as the largest single purchaser and by further subsidizing the construction of logging roads into national forests. In addition, the federal government pays the entire cost of managing the forest system including many activities that exclusively benefit the timber industry. All of these policies encourage further destruction of a critical natural resource.The Bush administration and the entire US government ought to understand the economic significance of a healthy environment as a kind of infrastructure supporting future productivity. If it is destroyed, many jobs now at risk will be lost. A case in point is the heated dispute between the timber industry in the Pacific Northwest and conservationists eager to protect the endangered spotted owl. This issue has been billed as a conflict between jobs and the environment. But if the remaining 10 percent of old-growth forest is logged out, as the timber industry prefers, the jobs will be lost anyway. The only question is whether the effort to create new jobs will begin now or later, after the forest is completely gone.The current administration also ought to do a much better job of encouraging appropriate technologies, since they can be an important benefit to set against all the costs of environmental degradation. Japan, for example, is already implementing an ambitious plan to cultivate what it believes will be a massive global market for new technologies for renewable energy and environmentally benign processes. Tragically, however, after having developed the first products using wind and solar energy, the United States is now a net importer of both technologies.There is an Alice-in-Wonderland quality to much of our current approach to economic analysis. Even as we have ignored the consequences for the environment of our present economic decisions, attention has been focused on increasingly frenetic speculation, merger mania, asset shuffling, and a range of other activities largely unrelated to the creation of competitive goods and services. The result is not only a diminished competitive position for the United States in the world economy, but also an acceleration of the trend toward the kind of short-term thinking that will make it harder to formulate a creative and effective response to the environmental crisis.Clearly, then, if sustainable development is to be become feasible, our approach to economic policy must be transformed. At the earliest opportunity, world leaders and their economic ministers should convene a global summit to discuss new approaches to this challenge. Their agenda should include the immediate adoption of a new set of economic rules of the road. Following is a summary of those I have proposed:The definition of GNP should be changed to include environmental costs and benefits.The definition of productivity should be changed to reflect calculations of environmental improvement or decline.Governments should agree to eliminate the use of inappropriate discount rates and adopt better ways to quantify the effects of our decisions on future generations.Government should eliminate public expenditures that subsidize and encourage environmentally destructive activities.Government should improve the amount and accuracy of information on the environmental impacts of products and provide it to consumers.Governments should adopt measures to encourage full disclosure of companies’ responsibility for environmental damage.Governments should adopt programs to assist companies in the study of the costs and benefits of environmental efficiency.Nations should revise their antitrust laws to encompass environmental harm.Governments should require the incorporation of standards to protect the environment in treaties and international agreements, including trade agreements.Environmental concerns should be integrated into the criteria used by international finance institutions for the evaluation of all proposed grants of development funds.Governments should make accelerated use of debt-for-nature swaps to encourage environmental stewardship in return for debt relief.Governments should develop an international treaty establishing limits on CO2 emissions by country and a market for the trading of emission rights among countries that need more and countries that have an excess amount.HOMEWORK QUESTIONS1. Capitalist economic theory fails to take into account what important factors?2. In calculating the GNP what do capitalist accounting methods ignore?3. How do the policies of the IMF and World Bank cause environmental destruction in the Third World?4.What is the “hidden cost of consumption?” Give two examples.5. What are “externalities,” and how can we account for them?6. What is meant by “intergenerational equality?”7. What role can government play to help the environment?8. Do you think Gore’s ideas and his criticism of capitalism are socialist, free market ideas or a third way of thinking about our problems? Explain your answer.9. Out of Gore’s 12 point program what do you think are the three most important?

 

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