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Starting in the early part of the last century economists endeavored to come up with measures of the overall economic performance of the macro-economy. The creation of the modern concept of GDP is usually attributed to the work of Simon Kuznets during the Great Depression at the NBER. For the record, I find incredible problems with the mere idea of doing this, but that is not the point of this post.

So, GDP, or gross domestic product, is our way of estimating the total value of goods and services produced within the United States. Economists have refined the measure over time to offer up more realistic metrics for the overall ability of our economy to produce. So there is a concept called “Net Domestic Product” which deals with the problem that capital assets depreciate over time. In other words, we try to subtract from GDP how much the value of the capital stock has fallen due to depreciation, since the productive capacity of the economy falls when “machines wear out.” In the past 40 years economists and environmentalists have picked up on this idea and said while it is true that capital assets depreciate (and therefore our measured output is due to the consumption of valuable capital which will not be there in the future) they can apply the same idea to capture the consumption of environmental assets. There are several terms for this concept, but let’s just call it Green GDP (or perhaps Net Natural National Product).

The creation of Green GDP measures typically includes at least three attempts to adjust GDP metrics – accounting for the “depletion” of natural resources; accounting for the damage caused by pollutants in our air and water; and accounting for the value of environmental “amenities” that are not typically traded on the open-market (and hence have no price attached to them). In future posts we’ll address each of those ideas separately.

Let it be recognized that while some thoughtful people aim to do this so that our GDP metrics capture the full productive capabilities of our economy, in every case these measures are used to reduce the size of measured GDP. But this is problematic for two reasons. First, the assumption that there are fewer resources available today than in the past is simply wrong. So by including some metric that uses a physical description of how much of a particular material was consumed in no way captures the real value of a “natural resource” to humanity today. Indeed, a serious accounting on this metric would have to show unimaginably large gains in annual GDP as our stocks of economically valuable resources continue to grow.

More important however is to consider the pollution measure, and the “environmental” threats that our consumption poses. For the last 40 years, measures of air and water pollution have shown dramatic improvements. But beyond that, human life expectancy has been on a steady upward march from nearly 30 years old at the start of the industrial revolution to nearly 70 (global average) today. That can only have happened because we have eliminated many of the most serious environmental hazards from our lives. This gets NO weight in measures of Green GDP. So, if we are able to install a methane burning gas stove in a home to replace the wood fire we used to cook over, the extraction of the “non-renewable” methane would count against us, as would the extraction of the metals in the ground to make the stove. Never mind that people’s lungs and eyes would now be free from disease from the ending of indoor open-flame cooking.

And beyond this, measures of Green GDP accounting do not seem to make an effort to talk about the natural destruction the environment causes itself. After all, species were going extinct, storms and weather events destroyed valuable resources, etc. long before humans made any headway in those areas.

While I think it is certainly a useful thought exercise, the creation of Green GDP accounting metrics is fraught with inconsistencies and measurement difficulties, and is typically used as yet another “scientific tool” to prove that market-based economic systems are “unsustainable.” But despite this, a proper Green GDP accounting would probably have to recognize that the measured and reported “normal” GDP dramatically understates the present condition of the world.

3 Responses to “Environmental National Income Accounting”

  1. “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.– F.A. Hayek”

    The quote above introducing this post presumably relates to the myriad interrelationships between human economic systems and the planetary ecosystem that sustains humanity. It may also relate to unintended consequences involved in redesigning financial incentives in society to better achieve sustainability, equity, social stability, well-being, justice or other perceived goods for individuals and society.
    The points of the post–natural resource scarcity is insignificant and pollution risks are overstated–are highly controversial. A major problem with these conclusions is that they relate to a U.S. centric view rather than a global view. We cannot indefinitely maintain current levels of importing natural resources from abroad (e.g., oil and minerals) and exporting pollution (e.g., atmospheric carbon) while consuming about 25% of the planet’s resources.

    While Green GDP accounting metrics is fraught with inconsistencies and measurement difficulties, the U.S. economic system by any GDP or other measurement is broken. Consider transitioning to “The Health Economy,” a system that can be embraced by Tea Party libertarians, progressive liberals, and those in between: http://doctormanagedcare.com/PMC/Book.pdf

  2. Harry says:

    I used to keep a book — entitled The Federal Reserve System — on my night table to read whenever I had a hard time getting to sleep.

    Now, I know Wintercow does not have enough time on his hands to write any dry economic opus, but, if he did, he could write General Theory of Green Accounting Principles.

  3. […] reading here: Environmental National Income Accounting – The Unbroken Window Comments […]

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