Doughnut Economics (7): Understand before you design

The sixth of Kate Raworth’s “Seven Ways to Think Like a 21-st Century Economist” is a green version of the fifth: forget the idea that economies must become dirty before they can become clean, and start designing ways to clean them up now.

What we are talking about here is a pattern in the data that is similar to Kuznets’s curve: as economies develop, environmental problems such as air quality and biodiversity decline increase, until they decline again. Again the question is whether this is a mere pattern in the data or there are fundamental mechanisms at work that justify labelling this as a ‘law’, and whether such a law, if it exists, should inspire policy recommendations. For the original Kuznets curve I explained that as far as I know, the pattern came before the purported ‘law’ (which few economists claim to be a fundamental law anyway), and that many of the policies that Raworth claims are inspired by the Kuznets curve actually aim to clear the mountains of debt that the respective countries (Greece and Argentina, for example) had accumulated. So I wasn’t so convinced her accusations stuck; with the environmental Kuznets, however, she has a point.

The mechanisms that economists commonly suggest to explain the environmental Kuznets are indeed a comfortable argument for policy makers and politicians to favour economic growth: as the argument goes, people need to get richer before they can start caring about the environment. Part of the explanation for the inverted U in environmental data is that people consider some of these environmental qualities a luxury that people can only afford once they have secured their livelihood. Indeed, as Prakash in her example illustrates, many poor countries, or rather their policy makers, argue that they are too poor to care about the environment: only when they have secured their own livelihoods they can start caring about elephants.

It is important to realise here that what we refer to so easily as “environmental quality” actually covers a lot of different variables, such as concentration of unpleasant odours, population sizes of rare species, concentration of toxic substances, all the way up to global temperatures running amok and enhancing the destructive power of hurricanes and whatnot. Compare these variables to Maslow’s pyramid: some environmental variables are of direct importance to our immediate physiological needs, such as clean drinking water; others are of more indirect but nevertheless no less importance, such as a stable climate; yet others are important for more higher-order needs, such as the sense of awe that we experience when we encounter a wild giraffe or a sperm whale, or the intense wonder and fascination when we listen to the melodic conversations of songbirds. Lumping this multitude of needs together, and pretending they are all equally essential for human life, is disingenuous. Like people worry about food and shelter before they start caring about self-realisation, it is understandable that developing countries consider poverty alleviation a more urgent matter than nature conservation. People such as Prakash might even consider Raworth’s argument colonial: there are many places in the world where nature conservation is considered a white man’s hobby. Take Skukuza, Kruger Park’s biggest camp, the name of which purportedly reflects locals’ bitterness at having lost their ancestral lands for the establishment of the park.

These subtleties, however, also mean that the environmental Kuznets curve may only show up for environmental variables that can be considered luxury goods. Moreover, Raworth makes the very valid point that rich countries may have cleaner air, but also bigger global footprints: instead of reducing their environmental impact they export it to countries that are willing to trade their air quality for income. That is their choice, a libertarian might argue, but it still gives the misleading impression that one can outgrow pollution.

Creative with green designs

I find Raworth’s recommendations unconvincing, however. “Economics is not about discovering laws: it is essentially a question of design.” I cannot begin to express how wrong this is: how can you design changes to a system if you don’t understand that system in the first place? Like Raworth, I also cringe at economists’ referring to mechanisms in an economy as “laws”. People are no Higgs Bosons: their behaviour is much more difficult to understand and predict. But that does not mean that their behaviour is completely unpredictable – if it were, Raworth’s beloved design would be pointless. What’s more, history has given us plenty of examples showing the danger of designing economic systems without understanding at least a bit of human behaviour and their interactions with institutions and each other.

This problem is pervasive in many of her recommendations. Companies should be generous, Raworth argues, giving back to the living systems on which they depend. That is a laudable goal, but those companies still have employees, and their families, with stomachs to fill. Yes, I complained in an earlier post that economists’ motto “get the prices right” treats people like incentive robots, but you can also understand this motto as making sure that companies that respect environmental boundaries at least do not go bankrupt for doing so. The same can be said for her recommendations on the cyclical economy: if recycling does not pay, markets have a way of weeding out companies that ‘overdo’ it unless governments fix the prices that companies face. Ditto for what she says about finance. The root of the problem is that the environment is a shared resource, so that individuals who cause pollution share the costs with all other users while reaping all the benefits for themselves.

There is a caveat here, however, and I wish Raworth would have considered it more closely. I just said that I don’t think people are the incentive robots that some economists seem to think they are. People are driven by considerations of morals and social norms as much as by cold economic incentives. If they weren’t there would be a lot more litter on the streets than there is already – luckily a lot of people still have the decency to use a waste bin. It’s just that under some circumstances, the economic incentives win. I don’t know whether this has been tested in the field much (this may be such a study), but it seems natural to expect that competition is a big factor here. Especially under very fierce competition, as in financial markets, companies will have limited room to act morally, and prices reign supreme. Does that mean that a little monopoly allows company owners the slack to follow their moral instincts? That would be one of those questions we would need to answer before we start designing any economic system.

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