True Cost Economics

The current economic model has failed us

| August 26, 2004

Economics, in its current form, is a very limited science. Classical economists are accustomed to quantifying cost in gain in simple monetary terms while ignoring the more sweeping ramifications of a particular decision. Air pollution, for example, costs residents of Ontario at least $1 billion a year in medical costs and missed work, but these figures do not make their way into the analysis of the businesses doing the polluting. Neither does the appalling destruction that China is currently wreaking on the environment, the cost of which damage more than outweighs the country's rapid economic growth. There is no room for such crucial factors in neoclassical economics, the predominant school of economic thought that assumes that people's decisions are guided by totally rational thought processes. Clearly, the destruction of one's habitat is not an entirely rational decision to make, and critics blast the isolated, 'autistic' manner in which modern economics employs a narrow scope and and a limited conception of cost and value.

A number of economists, fed up with the limitations of classical economics, have put forth a new paradigm; in which pricing includes a number of factors beyond an item's market value. The environmental cost of aviation, for example, adds at least $500 per passenger to airline travel. Recent mad cow scares have cost the cattle industry $6 billion dollars, and a World Health Organization study of France, Switzerland, and Austria found that 1.7 percent of the GDP was taken up by the costs of traffic pollution. By using these figures to paint a more complete picture of the transportation and cattle industries, economists will be able to more easily create value, not just in terms of raw profitability, but in terms of overall health and environmental impact. In fact, the new paradigm substitutes the more broad Genuine Progress Indicator (GPI) for the limited Gross Domestic Product, factoring leisure time, crime, and resource depletion into the measurement of a nation's success. With global warming racking up a yearly bill of $304.2 billion, businesses would be forced to take note of their own environmental practices in a way that the current model does not encourage. True Cost Economics is currently creating a sizable ruckus in the academic world, and its value as a system of thought is starting to be recognized by the economic establishment.
-- Brendan Themes

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