Sunday, July 29, 2007

Upside down economics

In his collection of essays entitled Earth In Mind David Orr introduces us to one William Nordhaus, a Yale economist who has been puzzling over the economics of climate change. The question Orr asks is whether Nordhaus is puzzling over the right things and in the right way. Orr is clearly interested in Nordhaus's views because those views very much represent the way most (but certainly not all) economists think about the natural world.

Back in 1990 in a one-line preface to an article by Nordhaus in The Economist entitled Greenhouse Economics: Count Before You Leap, the magazine's editors summarized Nordhaus's overall point as follows: "Careful cost-benefit analysis, not panicky eco-action, is the right answer to the risk of global warming." It's a statement that few would disagree with. Where the disagreement comes is how to tote up the costs and the benefits.

Of special interest are Nordhaus's views concerning which sectors of the economy are likely to be hit hardest by global warming and what effect that will have on society at large. In the 1990 Economist article he wrote:
Studies of the impact of global warming on the United States and other developed regions find that the most vulnerable areas are those dependent on unmanaged ecosystems – on naturally occurring rainfall, run-off and temperatures, and the extremes of these variables. Agriculture, forestry and coastal activities fall into this category.

Most economic activity in industrialized countries, however, depends very little on the climate. Intensive-care units of hospitals, underground mining, science laboratories, communications, heavy manufacturing and microelectronics are among the sectors likely to be unaffected by climatic change.

His views since then seem to have changed little as this excerpt from his new paper (July 24, 2007) on global warming and economic modeling indicates:

Economic studies suggest that those parts of the economy that are insulated from climate, such as air-conditioned houses or most manufacturing operations, will be little affected directly by climatic change over the next century or so.

However, those human and natural systems that are unmanaged, such as rain-fed agriculture, seasonal snow packs and river runoffs, and most natural ecosystems, may be significantly affected. While economic studies in this area are subject to large uncertainties, the best guess in this study is that economic damages from climate change with no interventions will be in the order of 2½ percent of world output per year by the end of the 21st century.

That's actually a significant dent in the world economy, but is it reasonable to believe that the harm to the economy will be limited to this amount if global warming goes unchecked?

Of course, there is just plain uncertainty about the trajectory of global warming. The Intergovernmental Panel on Climate Change provides scenarios which range from 1.8 to 4.0 degrees C of warming by the end of this century. James Lovelock, who believes global warming is now on a path to destroy world civilization, predicts 8 degrees C of warming in temperate regions and 5 degrees in the tropics.

But the question at hand is whether the relatively minor importance which Nordhaus assigns to natural systems is warranted. The answer is probably not quantitative, but conceptual. Orr does an excellent job challenging Nordhaus in the essay mentioned above. Here I only wish to add something visual as a way to think about this problem.

The two charts below (which you can click on to get a better view) use identical data to summarize the sizes of various industries in the U. S. economy as of 2005. (The data for the charts comes from the Bureau of Economic Analysis, U. S. Department of Commerce.) The first chart is a conventional pie chart. Someone viewing it might be forgiven for sharing Nordhaus's conclusion that agriculture and forestry are only minor parts of the economy and therefore even large effects on them due to global warming need not concern us much.

The second chart is how I conceive a properly informed ecological economist might depict the same data. The entire economy stands on the shoulders, as it were, of agriculture, forestry, and mining (especially the extraction of oil, gas, coal and uranium) and on the utilities that deliver the energy mined in usable form.

This method for depicting the economy was suggested to me by two things. First, Liebig's Law of the Minimum states that an organism's growth is limited by the amount of the least available essential nutrient. In the case of world society that nutrient would be food, though many would argue that fossil fuels are the essential nutrient since so much food production depends on the use of fossil fuels and their derivatives including fertilizers and pesticides. Second, a piece by Dmitry Podborits argues that it is nonsense to say that the U. S. economy is less vulnerable to oil supply disruptions today than in 1970s because it produces twice as much GDP per barrel of oil. Instead, Podborits suggests, we are more vulnerable to oil supply disruptions because we have so much more GDP balanced on each barrel of oil. The same argument might be made with respect to agriculture which in the United States in 1930 employed 21.5 percent of the workforce and made up 7.7 percent of GDP. In 2000 the numbers were 1.9 percent of the workforce and 0.7 percent of GDP. We are balancing an ever larger total economy on an agricultural economy that on a relative basis is shrinking. Certainly, we are getting more efficient, but are we becoming more vulnerable?

Of course, the United States could import food if the size of its agricultural sector declined without a corresponding increase in productivity. But such a strategy wouldn't work if every country pursued a conscious policy of shrinking its agriculture or if worldwide food production plunged abruptly because of poor harvests. (My charts might have been more illustrative had I constructed them for the world economy instead of just the U. S. economy; but, I was unable to find any suitable data. In principle, however, the same critique of Nordhaus would be even more applicable with regard to the world economy.)

Now look at the charts again and ask yourself which one more accurately depicts the importance of natural systems to the economy.

1 comment:

Anonymous said...

What we need to do is get a bunch of economists together and deprive them of food for a week or two - hopefully that might be sufficient to impress the fundamental importance of agriculture on them.