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On Planet Economics Killing Planet Earth is Rational

Constant economic growth is not doing the planet any favors. ‘Global average temperature has already risen by 0,8°C,’ ‘[a]round 40% of the world’s agricultural lands is now seriously degraded’ and ‘over 80% of the world’s fisheries are fully or over-exploited’ (Raworth 2017: 5, based on: Climate Action Tracker 2016; Global Agriculture 2015 and FAO 2010), to name just a few facts. Mainstream environmental economists argue that these problems are not caused by our market-based and profit-driven system of production having gone too far. In fact, it is said that these problems are externalities that result from the market not having expanded far enough.

The reasoning is simple: if you own a resource, you will want to maximize its current and future stream of revenue to the best of your ability. If you overexploit, your revenue may peak now, but as the resource is left degraded or depleted, future revenues will go down quickly and eventually dry up completely. If resources are commonly owned, however, the dynamics change completely. In this situation we get a race to deplete the scarce resource as quickly as possible, because ‘if you don’t, someone else will.’ For this reason, most fish, for instance, would have completely disappeared from the sea if it wasn’t for regulation. If the fish that fishermen depend upon for their livelihood are going to be hunted to extinction anyway, they would rather have the profit of that catastrophe for themselves than to allow the competition to take it. We thus end up in a situation that no market participant wants, while they all feel compelled to work hard to bring it about as quickly as possible. A real tragedy, known as ‘the tragedy of the commons’.

This tragedy can be averted if property rights for all environmental goods and services are defined and enforced. This may not be all that easy in practice. One would have to set up a series of contracts where e.g. exclusive rights to exploiting a certain resource would be auctioned off to the highest bidder, who can resell those rights at their discretion. Thus, someone exploiting the resource, will take care to leave it more or less intact for fear of lowering the price of their exploitation rights too much.

If you would really want to organize – say – fisheries this way, you would not only have to sell exclusive rights to fishermen for fishing edible species, but would also need to sell stewardship rights to selling the services of the surrounding ecosystem in the B2B market. Those that secure a good stake in the management of coral reefs for instance, would have a good business case. Coral reefs are the sea’s nursery and if they thrive, many fishermen would see an uptick in profits too. So it would be rational for governments to mandate them to pay a fee slightly below the uptick experienced to the coral reef management firm. (Governments must mandate this, because of the free rider problems that would otherwise occur.) Given that we do not know many of the complicated interrelations in the ecosystem, however, any such system is likely to be incomplete, transferring the burden to an overlooked part of the eco-system. But even if a complete system could indeed be set up, the mountain of contracts, rules and regulations governing it, is likely to be insurmountable.

In the paper world of economic models, the idea nevertheless seems very appealing. Even in this paper world, though, a nasty snake is hiding just beneath the grass. That snake is called the discount rate. As every freshmen economist learns, money has a time value. Most people would rather have a Euro more today, than two Euros in 10 year’s time. This is the whole justification for the existence of interest rates. Applying this reasoning to degradable or depletable resources however, implies that we shouldn’t really care whether the resource is still here in a 100, 150, 200 or so years. A rational entrepreneur securing exclusive rights to exploiting a resource, is supposed to coldly calculate how to maximize the net present value of the future revenue stream of the resource, given some discount rate. At any positive discount rate, it is rational to over-exploit.

So even if property rights are expanded to include all of our life giving systems, making all of nature’s services into regular commodities, profit oriented firms would still deplete and degrade them, albeit more slowly. So this ‘solution’ will still eventually drive all edible fish to extinction, force all breathable air out of this world, make sure all rain forests are gone and so on and so on. Maybe the last human on earth will find an economic textbook in the rubble and as he spends his last breath browsing its pages, he will be shaking his head in disbelief and exclaim sarcastically: ‘Look around, this utter devastation was rationally created.’

Let’s hope it doesn’t come to that. But to prevent it from happening, we cannot have trust in markets. Environmental markets may help, but I hope that most people realize that ‘money cannot be eaten’ and that killing is wrong, let alone killing on a planetary scale. If something is that wrong, it is more rational to forbid it, then to set up markets for it. The latter inevitably give the wrong message: it is only a little wrong and if you pay enough, it is fully O.K.


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