Four Economic Mistakes That Cause Environmental Problems (And How To Fix Them)

Our dependence on nature runs deep. It is undeniable that a pristine environment improves our health, prolongs our life and makes us more productive. Yet, during our lifetime, catastrophic environmental changes will occur because of four fundamental and correctable errors in the design of our economic systems.

As an economist and entrepreneur, I have studied these errors from both a theoretical and a practical standpoint, and as a naturalist, I regretted the destruction of the natural world that we see every day.

In my new book, Economies at risk: how nature’s neglect threatens our prosperity, I argue that we can correct each of the most glaring flaws in the system to correct our neglect of nature and allow the economy and the environment to coexist and feed each other. We can end these threats to our prosperity.

  • External costs pose the greatest threat to the environment by preventing nature and the economy from working together. External costs arise when a third party has to foot the bill for the negative consequences of a transaction. A transaction that happens every day is a good example of this: let’s say I buy gasoline, burn it in my car, and injure people who inhale exhaust fumes or whose climate is cold. altered by the greenhouse gases generated. The injured did not buy the gas. Yet the buyer does not pay for the damage done. There are many ways to solve problems like this, problems that come with a social cost. We may collect fees to reflect the costs incurred by third parties, we may give injured parties the right to sue, we may regulate activities that affect third parties, and more. What we cannot afford is to continue to ignore this nefarious mistake in our economic policies.
  • The second most important problem with our economic policies is that property rights are not always clearly defined. The consequence here is disastrous. Valuable capital is in fact destroyed or damaged. No one owns the fish in the sea: they do not become property until they die in the market. This lack of ownership leads to overexploitation because no one has any incentive to conserve or manage the population. As a result, many fish stocks have fallen by 90% over the past half century. It’s not just that the number of fish has decreased. Small fish tend to mature faster and have a better chance of reproducing before being caught; they also have a better chance of escaping capture. So, natural selection has determined that we now have a reduced population of fish. We are just starting to solve this problem with tradable quota systems introduced in many fisheries, which are working well.
  • A third problem is that the natural world provides services essential to our prosperity, but we don’t appreciate it. Natural assets provide a flow of services over time, just as physical or intellectual capital goods provide a flow of benefits, which makes the natural world a form of capital. Some of our most important and valuable assets are actually natural capital, yet we typically don’t include them in our accounts or on our balance sheets, which means, among other things, that our accounts don’t reflect their depletion. Take the case of fish stocks: it is an asset that we are depleting, and yet we do not see it in any of our accounts. Accounts should notify you when you run out of capital, but not ours. We have to change that, and it is easy to do.
  • The fourth and last error in the management of the economy concerns how we assess our economic performance. This is an area in which economists worship false gods. We use gross domestic product (GDP) as a standard, but it is not the right measure of economic performance. GDP can go up when bad things happen, like a hurricane or flood that needs rebuilding, and go down as a result of good things, like the introduction of long-lasting light bulbs, which means fewer are sold We should not be measuring ourselves by GDP growth, but by lasting increases in human well-being. Sophisticated methods of measuring GDP are under development. We need to implement them and assess our performance ourselves against the results.

The world is facing serious environmental problems. The maps are already being redesigned to reflect the loss of land mass from rising seas, and countries are starting to fail due to water shortages. The natural world is gravely threatened by poorly managed human activity, endangering not only human populations, but thousands of other species that inhabit forests and oceans.

Now is the time to use the tools at hand to manage wisely. We must use these tools widely and boldly to rebuild a prosperous and sustainable world and end threats to our prosperity caused by our neglect of nature.

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