Nature by the Numbers

In Spencer Banzhaf’s account of the history of environmental economics these are the two most pressing questions that environmental economists have asked. In Pricing the Priceless, Banzhaf starts from a version of the second question.

The environment is a resource we want to conserve for future generations so they can also use it. It is our responsibility, therefore, to rationally plan for its continuous use. But the environment is also a resource worth preserving as it is, for its beauty, for our spiritual enjoyment of it, for its own sake, even if, or perhaps especially because, it does not have any use. The idea of conservation, firstly associated with Gifford Pinchot (1865-1945), and the idea of preservation, firstly associated with John Muir (1838-1914), are the intellectual lines around which the debate develops in Banzhaf’s volume. Both approaches share the problem of pricing the priceless.

The story that Banzhaf tells us is a story of the development of ideas, a story that is not linear, not obvious (especially ex-ante), and a story of both tensions and synergies between academia, think tanks, and public agencies.

Banzhaf notes that the term environmental economics was not used until the 1960s, then become commonly used only in the 1970s, but its problems were older than the name. The development of environmental economics is entangled with the development of the understanding of externalities, both in Pigouvian and in Coaseian terms, of the public finance tradition, with agricultural economics, and with the government and the military in particular.

When the government had to develop a policy, it faced the problem of understanding if that policy was worthwhile. But how could we know? Cost-benefit analysis works well if one has commensurable costs and benefits. But what if the benefit or cost is the environment itself? Or nature? Or maybe outdoor recreation? Can we measure how much people are willing to travel to be outdoors? Can we reliably ask them how much they value the outdoors? Or how much they are willing to pay not to have it destroyed? What if we can compensate those who are facing the costs? What if we can only potentially compensate those who are facing the costs? What incentives do people have to tell the truth? Or what if high prices caused by the increased scarcity incentivize the discovery and use of substitutes?

The problem of the environment became more pressing during the Cold War. One of the problems was to make sure there would be enough resources to outlast the communist threat. Conservation and “efficient management” became a priority, especially in terms of water resources. It was difficult to try to find a method to estimate the value of the losses to nature generated by a water dam, let alone to human life. The pushback to any attempt to put a monetary value on an individual life, among other seemingly priceless things, incentivized economists to think not just in terms of costs and benefits but also in terms of trade-offs. So rather than just trying to recommend optimization, some preferred to simply identify the trade-offs among incommensurables. This allowed economic experts to offer policy makers an array of options to choose from, leaving the ultimate decision regarding what to do to politics, thus avoiding unpleasant and unpopular recommendations. Part of the problem was that optimization outcomes would not always be consistent with political outcomes, as concentrated interests would win out over the diffused interests of taxpayers and consumers (p. 185). Thus, economists found themselves divided between a belief in consumer sovereignty and a belief in political sovereignty, without any obvious solution.

To this reader, the book is thus a wonderful window into the discipline as well as into post-war America. Yes, it is a history of environmental economics, but environmental economics grew within economics, and economics grew within post-war American politics. To me, the message of the book is summarized in the following sentence:

• Having come into the government to bring their expertise to practical problems, they [economists] had at least partially lost control of their research agenda and were forced by their government agencies to perform such valuations. Thus, bureaucratic necessities became the mother of economic invention” (p. 229).

The book highlights the intricate and unintended intertwining between an academic discipline and a political reality.

There is much, much more in the book, from the history of and reasoning behind cap-and-trade polluting permits to the links with experimental economics. Everything is explained in detail and rigorously documented, as the forty pages of references testify. While perhaps not a book for a general audience, but an economist, or an educated person keenly interested in the environment, should be able to appreciate its rich content and its thorough narrative.

Footnotes

[1] Pricing the Priceless: A History of Environmental Economics, by H. Spencer Banzhaf. Cambridge University Press. 2024.