Ecological Economics: Valuing Ecosystem Services

Without valuing ecosystem services, like pollination by bees or the water purification of a watershed, society cannot accurately measure the overall impact of our economic decisions.

The Other Road To Serfdom

"The Other Road to Serfdom and the Path to Sustainable Democracy" offers a coherent vision, a progressive and hopeful alternative to neoconservative economic and political theory—a foundation for an economy that meets the needs of the 99% and just might help save civilization from ecological and political collapse.

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Our planet is finite. Our political and economic systems were designed for an infinite planet. These difficult truths anchor the perceptive analysis offered in The Other Road to Serfdom and the Path to Sustainable Democracy (University Press of New England, 2012). With wit, energy, and a lucid prose style, Eric Zencey identifies the key elements of "infinite planet" thinking that underlie our economics and our politics—and shows how they must change. In the following excerpt from chapter 6, “Getting Over GDP,” learn why society must begin valuing ecosystem services in order to measure the true impact of economic growth.  

As currently organized, our economy creates wealth by drawing down natural and social capital, a process that can’t go on forever. One positive result of an economic slowdown is that it slows this rate of ecological and social degradation, giving our system a little more time and breathing room to make the transition we need to make from our infinite-planet ways.

And, lest you think that in pointing this out progressives and environmentalists are uniquely indifferent to the human sorrows and difficulties wrought by recession, keep in mind that infinite-planet economists have long found a considerable amount of silver lining in the dark clouds of economic woe. High unemployment reduces “upward pressure” on wages and constrains the nonwage claims of labor, like the desire for safer working conditions; both are taken to be positive developments by corporations and those identified with them, including conservatives who have taken to heart the slogan once offered by a president of GM, “What’s good for General Motors is good for the country.” To some of these infinite-planet thinkers, recession is also an opportunity to release the economy from unwanted environmental regulation. Thus the remarkable avowal by Ryanair chief executive Michael O’Leary: “We would welcome a good, bloody, deep recession for 12 to18 months. . . . [It would bring a halt to the] environmental bullshit . . . that has allowed [Prime Minister] Gordon Brown to double air passenger duty. We need a recession if we are going to see off some of this environmental nonsense.”

With less particularly partisan sympathies, mainstream economists acknowledge that with recession comes what Joseph Schumpeter called “creative destruction,” the failure of outmoded economic structures and their replacement by new, more suitable structures. Downturns have often given a last, fatality-inducing nudge to dying industries and technologies. (Very few buggy manufacturers made it through the Great Depression.) With a good portion of 2009’s deficit-financed stimulus money being directed toward building renewable energy infrastructure, recovery from the worldwide Great Recession—the downturn that started with the collapse of the subprime lending market in the United States in 2008—may leave us with an economy several steps closer to being sustainable, an economy better prepared to deal with the waning of the petroleum era.

Gross Domestic Product: A Poor Measure of Economic Health

Creative destruction can apply to concepts as well. The current downturn offers an excellent opportunity to get rid of one economic concept that has long outlived its usefulness: gross domestic product, or GDP. It’s one measure of national income, of how much wealth Americans make, and it’s a deeply foolish indicator of how the economy is doing.

Every mainstream economics textbook that covers GDP in any depth at all offers cautions about using it as a measure of economic well-being—and then most of those books go on to offer reams of analysis and theory that take GDP to be a measure of economic well-being. None of them take good account of the fact that human well-being is, in total, much broader than material well-being and that GDP is a deeply flawed measure even of that. In its very structure GDP lies to us, telling us that infinite expansion of the economy’s ecological footprint is possible. It’s an infinite planet statistic, unsuited for our economic life on Factory Planet. It ought to join buggy whips and cassette recorders on the dustheap of history.

The first official attempt to determine our national income was made in 1934, while the country was in the Great Depression. How bad was the economic pain? No one knew, because there were no national data. “We had no comprehensive measures,” says economist William Nordhaus, speaking in the first-person plural on behalf of economists back then, “so we looked at things like boxcar loadings.” The goal of GNP was to measure, by dollar value, all economic production involving Americans whether they were at home or abroad. In 1991, the US Bureau of Economic Analysis switched from gross national product to gross domestic product to reflect a changed economic reality—as trade increased, and as foreign companies built factories in the United States, it became apparent that the United States ought to measure what gets made incountry, no matter who makes it or where it goes after it’s made.

Economic Well-Being vs. Human Well-Being

Since then GDP has become our most commonly cited economic indicator, the basic number that we take as a measure of how well we’re doing economically from year to year and quarter to quarter. It’s written into thousands of laws and contracts and is the defining element in the widely accepted, if unofficial, definition of a recession: GDP decline for two successive quarters. But it’s the product of a time when the sheer amount of economic activity could be mistaken for a good indicator of our level of economic well-being, and it ignores important contributors to human well-being that aren’t bought and sold in markets: the satisfactions and contributions of volunteer work, nonremunerated domestic production, strong social and family relations, and the ready availability of natural capital services like clean air and water. From the vantage point of the Great Depression, “having more stuff”—and getting people back to work—looked to be the end-all of economic and social progress, and GDP seemed to be a good measure of that.

It isn’t. Not only does GDP not include unpriced goods like volunteer work, housework, child rearing, and do-it-yourself home improvement; it also completely ignores the huge economic benefit that we get directly, outside any market, from nature. A mundane example: If you let the sun dry your clothes, that natural capital service is free and doesn’t show up in our domestic product; if you throw your laundry in the dryer, you burn fossil fuel, increase your carbon footprint, make the economy more unsustainable—and give GDP a bit of a bump.

Very often, the replacement of natural-capital services (like sun-drying clothes, or the propagation of fish, or flood control and water purification) with built-capital services (like those from a clothes dryer, or an industrial fish farm, or from levees, dams, and treatment plants) is a bad trade—the capital we build for ourselves is costly, doesn’t maintain itself, and in many cases provides an inferior, less-certain service. But in gross domestic product, every instance of replacement of a natural-capital service with a built-capital service shows up as a good thing, an increase in national economic activity. One result of GDP’s use as our basic indicator of economic well-being is the current global crisis in natural capital services, as their civilization-sustaining flow has been dramatically diminished. It’s no accident that we haven’t held on to a source of well-being that our basic economic indicator fails to value.

This points to the larger, deeper flaw in using a measurement of national income as an indicator of economic well-being. In summing all economic activity in the economy, gross domestic product makes no distinction between items that are costs and items that are benefits. If you lose your access to free clean water, as some communities have as a result of fracking and mountaintop-removal coal mining, that doesn’t show up in GDP as a cost; but the bottled water you now have to buy is included and shows up as increased economic activity, a supposed benefit. GDP is thus literally perverse: if you get into a fender-bender and have your car fixed, GDP goes up.

A similarly counterintuitive result comes from other kinds of defensive and remedial spending. Health care, pollution abatement, flood control, and costs associated with population growth and increasing urbanization—crime prevention, water treatment, school expansion, wider roads to handle increased traffic—all increase GDP when we buy them, even though what we mostly aim to buy isn’t an improved standard of living but the restoration or protection of the quality of life we already had.

The GDP and Katrina

The amounts involved are not nickel-and-dime stuff. Hurricane Katrina produced something like $82 billion in damages in New Orleans, and as the destruction there is remedied, GDP goes up. One economist to whom I spoke pooh-poohed this flaw in GDP by pointing out that some of this remedial spending on the Gulf Coast represents a positive change to economic well-being: old appliances and carpets and cars and housing are being replaced by new and presumably improved versions; flood victims who rebuild are getting new stuff. But that is, frankly, a foolish observation. The vast majority of the expense of recovering from the flood leaves the community no better off—indeed, leaves it mostly worse off—than before. The failure of economists to call for subtracting such remedial expenditures from GDP is, at bottom, a disciplinary stamp of approval to a host of stupid, obviously uneconomic exchanges: no sane person would pay the full cost of demolishing a perfectly useful house and rebuilding it in order to get new carpet and a new refrigerator.

The damage done by Katrina to the Gulf Coast illustrates one kind of natural capital service in particular, and the consequences of failing to value it. Between New Orleans and the Gulf Coast there once lay a band of wetlands fifty miles wide. A marsh is a sponge; a strip of it a mile wide can absorb four inches of storm surge. When the bayous south of New Orleans were lost to development—sliced to death by channels to move oil rigs, mostly—gross domestic product went up, even as these “improvements” destroyed the city’s natural defenses and wiped out crucial spawning ground for the Gulf Coast shrimp fishery. The bayous were a form of natural capital, and their loss was a cost that never entered into any account—not GDP or anything else. Had those bayous been in place, they would have absorbed seventeen feet of Katrina’s twenty-two foot surge. In all likelihood the city’s built-capital defenses would have held against a storm surge diminished by bayou absorption.

Gross Domestic Transactions

Wise decisions depend on accurate assessments of the costs and benefits of different courses of action. If we don’t count ecosystem services as a benefit in our basic measure of well-being, their loss can’t be counted as a cost—and then economic decision making can’t help but lead us to undesirable and perversely uneconomic outcomes.

The basic problem is that gross domestic product measures economic activity, not benefit, and it doesn’t distinguish remedial and preventive activity from the beneficial kind. If you kept your checkbook the way GDP measures the national accounts, you’d record all the money deposited into your account and make entries for every check you write—and then add all the numbers together. The resulting bottom line might tell you something useful about the total cash flow of your household, but it’s not going to tell you whether you’re better off this month than last or, indeed, whether you’re solvent or going broke. That’s GDP: it measures the commotion of money in the economy, not the physical production that may (or may not) improve our general standard of living. We ought to rename it “gross domestic transactions”—a statistic that fewer of us would mistake for a measure of well-being.

Because GDP is such a flawed measure of economic well-being, it’s foolish to pursue policies whose primary purpose is to raise it. Doing so is an instance of the fallacy of misplaced concreteness—mistaking a map for the terrain, mistaking an instrument reading for the reality it represents. When you’re feeling a little chilly in your living room, you don’t hold a match to a thermometer and then think, “Problem solved.”  But that’s what we do when we seek to improve economic well-being by prodding GDP.

Cantril Self-Anchoring Striving Scale

This is readily illustrated by the events in Egypt and Tunisia during the Arab Spring of 2011. The regime changes there were widely hailed as victories for democracy, as proof of the liberalizing power of social networking media, as testimony to the power of nonviolent political action. All of that they may indeed have been, but they were also something else: a cautionary lesson in mistaking GDP for a measure of economic well-being. Despite significant gains in per capita GDP in both Egypt and Tunisia in the past decade, the level of well-being of their citizens had been falling, and that decline played a very large role in putting people into the streets in protest.

The details: in Egypt, per capita annual GDP rose from $4,762 to $6,367 between 2005 and 2010. In Tunisia it rose from $7,182 to $9,489. But both countries saw a significant decline in the percentage of the population that is classified as thriving according to a standard, well established measure.

That measure is the Cantril Self-Anchoring Striving Scale, developed by a researcher named Hadley Cantril. It’s a survey research tool and asks respondents to answer a few simple questions:

Please imagine a ladder with steps numbered from zero at the bottom to ten at the top. The top of the ladder represents the best possible life for you and the bottom represents the worst possible life for you. On which step of the ladder would you say you personally feel you are standing at the present time? On which step of the ladder do you think you will stand about five years from now?

To rank as “thriving,” respondents have to have positive views of their current place on the ladder (seven or higher) and positive expectations about the future (eight or higher). Below that, respondents are ranked as “struggling”—their “ladder-future” expectation is lower than the present, or both values fall below the thriving range. Below struggling is “suffering,” people who report their place on the ladder at four or below.

The Cantril Scale correlates with objective and subjective markers of well-being. Thrivers have fewer health problems and fewer sick days, while reporting less worry, stress, and anxiety and more enjoyment, happiness, and respect. Those in the struggling category report more daily stress and worry about money than the “thriving” respondents and take more than double the amount of sick days. Those in the “suffering” category are more likely to report that they lack basics like food and shelter, more likely to report physical pain, and more likely to experience higher levels of stress, worry, sadness, and anger. They have more than double the rate of diseases compared to “thriving” respondents.

In both countries, as GDP rose steadily, the number of citizens categorized as “thriving” fell. In Egypt in 2005, 29 percent of people reported themselves as thriving, but that number fell to just 11 percent five years later. In Tunisia, Cantril Scale data are unavailable prior to 2008, when 24 percent of the population could be classified as thriving; that number fell to 14 percent—a 40 percent decline—in just two years.

Declining Standard of Living, Rising GDP

The nonviolent revolutions in both countries may have been motivated less by abstract commitment to democratic freedom than by widespread experience of a declining standard of living and increased economic insecurity, even in the face of rising GDP. As Hayek had warned half a century ago, “The one thing modern democracy will not bear without cracking is the necessity of a substantial lowering of the standards of living in peacetime.” In the modern world—and perhaps because of new media, which make it much harder for totalitarian states to control public and civic discourse—the warning needs to be made more general: not just democracies but even repressive regimes don’t fare well when there’s a substantial lowering of standards of living in peacetime. Within the standard model, a rising GDP and a declining standard of living amount to a paradoxical result. Two factors contributed to this paradox: increasing inequality in income and increasing food prices.

Thanks in part to the Soviet-built Aswan Dam, which interrupted the regular cycle by which Nile delta farmlands were renourished by annual flooding, Egypt has in past decades been the world’s single largest importer of Russian grain. When Russia announced an embargo on grain exports (the result of unprecedented, climate-change-driven weather that scorched into ruin a quarter of Russia’s usual annual harvest), the price of food shot up. Before the embargo, the average Egyptian family spent 38 percent of its income on food (for comparison: that figure is 7 percent in the United States). Most simply couldn’t afford the post-embargo higher prices, and hunger and food insecurity spread through the middle class. Perversely, GDP counted higher food prices as a positive contribution to well-being.

Because of that basic flaw, a rising GDP, even a rising per capita GDP, did not mean a rising standard of living. And even if GDP were a more accurate measure of material well-being, it would still be mathematically possible for a very large number of people to become worse off economically as per capita GDP rises. This can occur when there is growing income inequality (i.e., the benefits of increasing GDP aren’t widely shared).

In Egypt and Tunisia, one or both of these factors shaped history.

Rising per capita GDP and falling well-being became an economic fact—and a politically charged social condition. Declining standards of wellbeing are politically destabilizing and can lead, expectably enough, to widespread support for sweeping change.

In Egypt and Tunisia the regimes happened to be repressive, and the call for change came as a commitment to democracy, an end to corruption, and demands for civil liberties. But within democracies, declining standards of living can have the opposite effect. Open and institutionalized systems of regime change—voting—will absorb the discontent for a time, but if the decline lasts too long, and if it can’t be blamed (successfully) on a particular party in power, pressure grows for stepping outside established parties and systems for new, radical, revolutionary approaches. Democratic forms are no certain proof against a slide into repressive forms. No system of government—despotic or democratic—fares well when the majority of its citizens experiences a declining standard of living.

Thus the changes wrought by the Arab Spring are not only worth celebrating, but also offer us a cautionary lesson. Sustained or rising wellbeing is what is economically and politically desirable, and we should measure it directly, instead of counting on GDP to do the job. And because well-being includes non-economic factors (like enjoyment of a healthy environment, enjoyment of rich and rewarding leisure time, enjoyment of family and social relations), it is possible to have a rising standard of well-being while per capita GDP remains constant or even decreases.

What’s the Solution?

A host of alternatives to gross domestic product have been proposed, and most of them tackle the difficult problem of placing a value on goods and services, and of assessing aspects of human well-being, that never had a dollar price. The alternatives are controversial, because that kind of valuation creates room for subjectivity—for the expression of values that are not as cut-and-dried as market price.

How, after all, do we judge the exact value of the services provided by those bayous in Louisiana? Was it $82 billion? But what about the value of the shrimp fishery that was already lost before the hurricane? Or the insurance value of the protection the bayous would be offering against another $82 billion loss? And, at a broader and even more difficult level: what about the security and sense of continuity of life enjoyed by the thousands of people who lived and made their livelihoods in relation to those bayous before they disappeared? It’s admittedly difficult to set a dollar price on such things—but this is no reason to set their value at zero, as gross domestic product currently does.

Robert Zoellick, president of the World Bank, is a recent convert to this line of thinking. He’s not exactly a poster child for progressive causes—nominated to the bank by Bush Junior, he was Bush Senior’s deputy secretary of state and signed the infamous letter from the Project for a New American Century calling on Bush Junior to invade Iraq and oust Saddam Hussein. He’s got some credentials as a practicing conservative. But he’s also on the board of the World Wildlife Federation; he seems to have a particular interest in the plight of panda bears. And perhaps for him, as for many others, a totemic attachment to one symbolic species unfolded into a larger sense of care and concern for the web of life within which that species, and every other, finds a home. In October 2010 Zoellick spoke to a conference convened in Japan to find ways to halt the destruction of ecosystem diversity, saying, “We need to assist . . . economic agencies to measure ‘natural wealth.’ . . . The value of services we derive from ecosystems shouldn’t be assumed to be zero.” As he explained: “In clearing mangroves for shrimp farming, the calculation will no longer simply be the revenue from profit on shrimp farming minus the farming cost. It would now deduct the loss of coastal protection from cyclones, and the loss of fish and other products provided by the mangroves.”

Zoellick’s call to measure natural wealth is an admission that our economic accounting systems don’t capture all costs and benefits—and that the standard, market-based model that led us to rely on GDP as an indicator of well-being is fundamentally flawed. To state the problem in the most abstract, most theoretical terms: if everything that contributes to human well-being had to be bought through a market, and if everything bought in markets was a positive contribution to well-being (instead of being a defensive or remedial expenditure), and if the price of everything accurately reflected all the costs involved in its production (including ecosystem losses and social costs imposed on individuals and communities by production), then and only then would GDP begin to be an accurate indicator of our level of well-being. Under those completely unrealistic conditions, the cost-benefit calculations that Zoellick wants to modify would not need to be modified.

The problem with GDP isn’t just our use of it; the problem with our use of it signals a deeper problem whose roots lie in the nature of market activity itself. Left to themselves, markets can’t produce socially optimal amounts of some goods—pure public goods, goods whose benefits are neither completely rival nor completely excludable. In general, markets can’t produce socially optimal amounts of anything, not unless prices tell the truth—and for a long time our prices have been lying to us about the economy’s root in nature. Changing that is no minor tinker but a wholesale transformation of standard economic theory.

As noted earlier, before we can count decline of ecosystem services as a loss in our accounting system, we have to know their value. Ecological economists have been working to define those values for decades. Some ecosystem services seem to have a clear market value, as when beekeepers are paid to place their hives in orchards needing pollination services. A clear dollar price is attached to the provision of the service. But it’s the bees that actually do the work, and they aren’t paid. No bees, no crop; by that measure, the value of bee labor is the value of the total harvest.

That’s just one possible method of inferring a value for ecosystem services. Others have names like “avoided cost,” “replacement cost,” “factor-income,” “travel cost,” and “hedonic” pricing. Avoided cost gives a solid number for the value to New Yorkers of the water purification services of their watershed. New York City has been buying and preserving land that drains into the Hudson and Delaware Rivers, looking to save the $6 billion that a water filtration plant would cost the city; that can be taken as the value, to New Yorkers, of the water purification services of the watersheds that supply the city. And the value of the storm protection services of Louisiana bayou is, in retrospect, fairly easy to calculate. (So is the value of that service into the future: until climate change started depriving insurance companies of the usefulness of historical weather data, they were expert at this sort of risk-to-benefit calculation, because their profit margins depend on them.) Replacement cost is similar to avoided cost and can be similarly clear. Pollination services can be valued at what it would take to do the job by (human) hand: $6 billion to replace US honeybee pollination alone, according to one study.

The factor income approach tries to quantify something else—the increase in human incomes that comes from ecosystem services. When cleaner water boosts marine life, the quantity of fish that can be sustainably harvested increases, which increases the income of fishermen.

Travel cost and hedonic pricing are familiar to mainstream economists, who have long been using them to estimate some aspects of consumer benefit. If people will pay money to travel to a national park, or pay extra for a house on the beach, then parkland and oceanfront property must provide services with a measurable dollar value.

Problems with Subjective Valuation

None of these methods is completely satisfactory for all services, and some services have no clearly appropriate method. Different methods give different results.

Beyond these problems lie others. The attempt to parse the value of individual ecosystem services to particular recipients doesn’t fully capture the complex interactions of ecosystems and the fact that they exist on the planet as wholes, not as bundles of discrete multitasking service providers. The ocean that provides a beautiful view is also home to fish, host to 70 percent of planetary photosynthesis, and a major element in the planet’s climate control. Upland forest that purifies New York’s water also moderates flooding, yields forest products, holds recreational and aesthetic opportunities, and provides refuge to species that perform other services, like population control of prey and pest species, and so on. Interactions and synergies—the ones we know about—have to be mapped, to avoid undervaluing or double counting. And some ecosystem services have no replacements: the ozone layer that protects us, and all life, from radiation damage is crucial to the existence of life on the planet, and no human engineering could ever work as fully or as well.

That suggests that the value of the ozone layer is the value of a habitable planet—which many of us would say is infinite. There’s no conceptually elegant way to put a dollar price on incremental damage to something infinitely valuable.

And there are deeper, philosophical issues. The selection of the valuation method is in part the selection of the result. Within the results of any one valuation method, the results that are obtained can be internally consistent—they can have reasonable, rational relationships that can serve as the foundation of economically rational decision making. If, for instance, all other variables are equal, then we can logically assume that a certain amount of forest here would provide the same amount of ecosystem services as the same amount of an identical forest there. And we can identify formulas and algorithms that tell us at what rate the quantity of those services change as the forest area is increased or decreased (because of synergies between the elements of ecosystems, the relationship isn’t linear—when you halve the size of a forest sometimes you reduce ecosystem services by more than half). But the choice between methods can seem arbitrary, hence subjective. Rational choice theory doesn’t take kindly to arbitrary decision making rooted in subjectivity—not unless the subjectivity is consumer choice that’s been laundered first by being cumulated across an impersonal market; which is to say, economics has never been totally free of subjective valuation.

Another problem: what is the present value of a cost, or the risk of a cost, that is avoided in the future? What might future generations pay us today, if they could, to stop the destruction of ecosystems whose services they’ll want in the future? The only correct answer is “We can’t know.” We need some kind of answer if we’re to be economically rational about valuing ecosystem services; but any useful answer is as philosophical as it is technical.

Ultimately, putting a cash value on ecosystem services is like putting a cash value on a human life. Romantics protest that both efforts are impossible, morally suspect, and pretty certain to be wrong. All of these are reasonable objections. But we place a monetary value on human life, implicitly, all the time. Is it worth putting airbags in cars to save 2,788 lives a year? Collectively we’ve said yes, and a bit of information on cost and a little arithmetic will tell you the implied value of a human life. Would an additional MRI machine in a city hospital be a wise investment? If we’re going to make a rational decision, we have to equalize lives-saved-per-dollar-spent among competing choices and decide how much to spend. 

Unless we’re willing to spend, literally, an infinite amount on health care technology, the amount we spend implicitly sets a value on individual human life. Such economic cost-benefit analysis aside, justice (and tort law) sometimes demand that we make an explicit calculation of the value of a human life, as when compensation is awarded to family survivors of a wrongful death. Valuing ecosystem services is just as difficult, and just as necessary. The default is to continue to value them at nothing, and even the World Bank sees that that’s wrong.  

If in politics “Follow the money” is apt advice, in economics and ecology “Follow the energy” proves equally useful. An economy subsists on intake of matter and energy. With enough energy, all the matter that moves in the economy could be recycled. Energy is ultimately what’s scarce, and its flow defines the relations within ecosystems and economies. One of the most promising approaches to valuing ecosystem services looks to the energy embodied in ecosystems and their products. As developed by ecological economist Robert Costanza and others, this energy approach to the problem may yet produce a nonsubjective, nonanthropocentric, intergenerational system of valuation—one that can encompass ecosystem services.

Given all the problems, the task of putting a monetary value on ecosystem services begins to look like rocket science. Would that it were that easy. With rocket science, at least you get a ready indicator of success: the rocket either does or doesn’t do what you intend. With valuing ecosystem services there’s no experimental feedback, no chance to return to the drawing board. Generations to come will be the ones who know whether we got the numbers right. It’s a daunting, difficult task, filled with potential for contentious disagreement, and the result will have to be implemented within political systems that are vulnerable to influence by entrenched interests.

Still, it’s better than the alternative, which is to leave these critical services unpriced and watch them disappear. That’s not just economically irrational, it’s collective suicide.

This excerpt has been reprinted with permission from The Other Road to Serfdom and the Path to Sustainable Democracy, published by University Press of New England, 2012.