The Great Invention: The Story of GDP and the Making and Unmaking of the Modern World - Ehsan Masood (2016)

Chapter 8. $33 Trillion Man

Chemistry has outgrown alchemy and astronomy has emerged from astrology.

—Herman Daly on economics’s reluctance 
to embrace the scientific method (2013)

In 1970, a few years before the great publishing sensation that was The Limits to Growth, one of its lead authors saw an opinion article in the New York Times written by Herman Daly, a then relatively unknown economist based at Louisiana State University.1 In the article, headlined “The Canary Has Fallen Silent,” Daly questioned why economies must continually grow and what the long-term consequences of growth without limits might be. These were essentially the same questions that the Limits to Growth team had been asking, except that Daly felt no need to resort to computer-based projections for an idea that he called steady-state economics. “I didn’t use any computer modeling,” Daly would tell me in an interview. “For me the idea that there are limits to growth was totally intuitive. It is common sense. The computer model helps to strengthen it, but we don’t need math to ‘prove’ it.”2

Daly, eighty-five at the time of writing, is important to the story of GDP because he is one of the first academic economists willing to bridge the gulf between Maurice Strong and Mahbub ul Haq. He could combine Maurice Strong’s environmentally based critique of growth with Mahbub ul Haq’s economic one. Like Haq he could see the dangers of a badly constructed index. At the same time, like Strong, he understood that economists need to learn to think and operate inside physical limits. “Chemistry has outgrown alchemy and astronomy has emerged from astrology,” he says. But economists continue to work as if they live in a parallel world to the rest of the scientific community. Such a view, as we shall see, would keep Herman Daly at the periphery of his professional colleagues. But his willingness to stand up and ask awkward questions also meant he would become a magnet for the small but growing movement of scholars who wanted to question models of economic growth but had few other people to turn to.

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Herman Daly was born in 1931 in Texas to parents who ran the local hardware store. A child of the Depression and World War II, he told me that in his case money wasn’t so much the problem as education, or the lack of it. “My parents weren’t college educated,” Daly says. “Dad really felt the lack of an education and was eager that I got one.”3 It was Daly’s good fortune that Rice University was on his parents’ doorstep, and he took his undergraduate degree there before moving to Vanderbilt for a PhD in development economics.

Daly was interested in learning about how poor countries can become richer. He went to Brazil, where he taught and did some research. It was here that he came across Principles of Political Economy by John Stuart Mill (1806–1873). Mill was an English philosopher, liberal member of the British Parliament, and advocate of human rights, including, as it happens, the right for people to be happy. These days Mill is remembered for being an early supporter of free markets, but Daly also discovered that Mill was no fan of constantly expanding economies. On the contrary, Mill argued that the logical conclusion of growth would be environmental destruction and reduced quality of life (less happiness). Mill concluded that a “stationary state” was surely better.

Daly took Mill’s stationary state, rephrased it for the 20th century, and published his signature book, Toward a Steady-State Economy, in May 1973. The purpose of societies shouldn’t be just to grow, meaning to become materially richer, Daly would argue. Instead, governments should find ways for their citizens to develop in other ways. People should be encouraged to be happy without the need to drill holes in the ground for oil, without encouraging citizens to spend money they don’t have or buy consumer goods they don’t need.

Like Aurelio Peccei, however, Herman Daly also found that it wasn’t easy to convince the people who mattered. In his case, heads of economics departments, writers of textbooks, and even young up-and-coming academics were skeptical if not a little afraid of what they were hearing. That is understandable to a large extent. By the 1970s economics was just about getting used to speaking the language of one new discipline—it was getting more mathematical. Now here was Daly telling colleagues they should forget that and start worrying about physics and biology.

Over the years Daly says that he began to see a drop in students wanting to study with him for their PhDs, not because they didn’t want to, but because they knew they’d fail to get past a committee of more orthodox economists in order to receive the qualification. “That any student wanted to do a PhD with me made them prima facie incompetent” in the eyes of other economists, Daly recalls. Just as with the team that put together The Limits to Growth, Herman Daly would discover that the world isn’t kind to heterodox thinkers, especially those who like to question the views of powerful people. It didn’t matter that Daly was merely popularizing an idea from the great John Stuart Mill. What mattered was his skepticism around the need for constantly rising economic growth.

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Not everyone who knocked on Herman Daly’s door left disappointed, however. One day Robert Costanza, already a PhD, joined Herman Daly at Louisiana State University. Today, of the some 2,000 or more researchers worldwide who study how economics interacts with the natural world, Robert Costanza is arguably the best known to a mainstream audience, if not the most influential. His research has been cited more than 3,000 times, the most for anyone in the field. He has also published with more than 100 fellow scientists, again, more than anyone else in the field to date.4

With the mainstream economics profession skeptical of the idea that economics should operate inside the boundaries of science, Daly, Costanza, and other colleagues decided they had to strike out on their own and create a new subfield, which they called ecological economics.5 Ecological economics is the study of economics that recognizes that societies do not live in an earthly utopia, but on a planet that has constraints, and that economic decisions have environmental consequences.

The difference between a mainstream economist and an ecological economist is often the approach they take to the same question. So, for example, a mainstream economist will want to understand how economies grow; an economist with an interest in public policy (such as Mahbub ul Haq) will want to understand the components of that growth and its implications for the lives and livelihoods of people. An ecological economist, in contrast, will question what growth means for ecology and environment. He or she will not take growth as a given.

One absolutely key question that many (but not all) ecological economists have been asking from the earliest days is what would happen to GDP if the environment were taken into account. Would economies look bigger or smaller if, say, the value of forests and lakes were included inside GDP? And what would happen to growth rates if forests and lakes suffered degradation?

One answer to this question emerged in 1997 in a landmark research paper coauthored by Costanza and twelve colleagues and published in the science journal Nature.6 Costanza and his team estimated that the size of world GDP (at the time) could increase to $33 trillion if it also included estimates for the environment and what is called “natural capital.” This figure, along with the team’s methods and assumptions, would be fiercely attacked by both economists and environmental groups. Environmental groups especially believed (and many still do) that putting a dollar price on nature is in fact to devalue it. But Costanza was savvy enough to know that without a monetary valuation, and without such a valuation taking place inside GDP, environmental protection would continue to struggle to attract the attention of policy makers.

The team was careful to acknowledge uncertainties in many of the figures and as such said that a likely value would fall in the range of $16 trillion to $54 trillion. In contrast, world GDP at the time was $25 trillion and US GDP was just under $7 trillion. It meant that if world GDP included environmental accounts, the total value would be larger than what it was in 1997. Still, one implication of this finding was that many countries rich in natural resources (but poor in other ways) might find themselves higher up the GDP table if environment was accounted for in their GDP figures.

Nature put the paper on its front cover under the headline “Pricing the Planet.” As this wasn’t meant to be a purely academic exercise, Costanza and his team used the space allotted to them by the journal to ask pointedly why it is that GDP lacks an environmental dimension. Why, for example, does GDP fail to take into account the value that oceans and forests, wetlands and rivers, provide? And why does GDP take environment into account for the wrong reasons?

Costanza and his colleagues wrote:

What this study makes abundantly clear is that ecosystem services provide an important portion of the total contribution to human welfare on this planet. We must begin to give the natural capital stock that produces these services adequate weight in the decision making process, otherwise current and continued future human welfare may drastically suffer. World GNP would be very different in both magnitude and composition if it adequately incorporated the value of ecosystem services. One practical use of the estimates we have developed is to help modify systems of national accounting to better reflect the value of ecosystem services and natural capital.7

The paper proved to be a sensation, dominating global science and environment news coverage for some time after its publication. Partly as a result of the media attention, the paper also generated one of the biggest scholarly controversies of that year.

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“Scientifically ill-founded.” “Foolhardy.” “Flawed.” These are a few of the choice reactions that the paper generated from mainstream academic economists, including many of those with a strong interest in valuing the environment. The paper was rightly seen as a direct assault on their field from a scientist most had never heard of, and in a journal that had little if any record of publishing economics papers. Kerry Smith, a professor of environmental economics at Duke University, said in a letter to Nature that the paper combined “bad economics with bad ecological science.”

For a variety of reasons (many of them good ones), mainstream economists told Costanza that he could do no such thing as put a dollar value on the world’s ecosystems services. Among the criticisms, Costanza was told that, according to the “laws” of economics, a free good can’t have a price, as it is not traded in the conventional sense: it isn’t bought and sold on an open market. Leading mainstream economists also questioned how Costanza intended to go about finding every single piece of environmental service in every country, when in many parts of the world, such data has yet to be collected.

Some of these arguments were the same as those leveled at Aurelio Peccei and his team of computer modelers more than twenty-five years before Costanza’s work. The mainstreaming of computers and the advent of Big Data have made no difference: Any number that pretended to represent the value of the Earth’s ecological systems, these economists warned Costanza, would at best be meaningless and at worst, dangerous.

Among those economists who would take such a view was no less than Costanza’s mentor Herman Daly. In Costanza, Daly had found a fellow academic who could agree that economies must operate inside ecological limits. But Daly could not agree to including the natural world inside GDP and did not join Costanza’s effort—though he would not criticize it in public. Daly says that because so much of his own critique of mainstream economics was to question claims of numerical precision, he found it hard to then embrace this when it came to endorsing change in GDP.

Many of the economists’ criticisms were justified, and Costanza’s team did have some serious thinking to do. How to put a price tag on a forest or on an ocean, when these are hardly, if ever, going to be traded, was (and remains) a valid question. The research team solved this partly by asking what people (or governments, or industry) would want to pay if a particular ecological service suddenly ceased to exist. What would a user, for example, be willing to pay if he or she was forced to keep a threatened environmental service from becoming extinct.

A good example of this is the story of New York State’s Catskill Mountains. The Catskills provide a valuable water purification service. The water that New Yorkers drink and use for cooking, washing their cars, and hosing their patios comes courtesy of the natural purification system of the Catskill Mountains soils. When it rains, the soils act to purify the water, which finds its way into aquifers before it is diverted into New York City’s water supply. If the Catskills’ natural aquifers were built over, or if they were allowed to degrade in some way, New Yorkers would be forced to pay much more for their clean water. In 2012, the city authorities worked out that an equivalent water treatment plant would cost $8 to $10 billion to build. In contrast, at the time it cost $1.5 billion to keep the Catskills in good health.8 For Costanza’s purposes, the value of the Catskills would be $1.5 billion because that is what the city’s leadership would be willing to pay to keep them in functioning health.

Still, not every natural water treatment system is as well-known as New York’s Catskills. For many natural processes, Costanza and his team had to make not much more than an educated guess as to how much someone would be willing to pay to replace it should it vanish (a guess that nonetheless would have been based on the published research literature).

It wasn’t just economists who were angry. I also discovered just how opposed some conservationists were to the idea of valuing nature. They thought it vulgar that we should even try to put a dollar price or use words such as “capital” to describe something so precious, so beautiful, and yet so important as nature. Others noted that Costanza and his colleagues seemed to assume that all of nature is worth preserving, when clearly there are some aspects—invasive species, for example—that we wouldn’t want to protect. Conservation biologist David Ehrenfeld, quoted in the New York Times, said, “I’m afraid that I don’t see much hope for a civilization so stupid that it demands a quantitative estimate of the value of its own umbilical cord.”9

By far the most detailed critique, though, came from the formidable David Pearce, a professor of environmental economics at University College London. A towering figure in his field, he was a sometime adviser to the Thatcher government in Britain and someone (rather like Solly Zuckerman) to whom Conservative officialdom listened. Sadly, he died in 2005 of leukemia at the age of sixty-three.10

Pearce, already an established thinker in valuing the environment, had big problems with the $33 trillion figure, which he thought to be massively inflated. Pearce also questioned whether it could ever be possible to know, with any accuracy, how much someone would be willing to pay for each and every environmental service in the entire world. In a separately published four-page review in Environment magazine, Pearce called Costanza’s work “a violation of basic economic principles.”11

To illustrate what he meant by this, Pearce used a method of arguing beloved of courtroom lawyers: take one or two facts from the opposing side’s case and then slowly but publicly tear them to shreds as an illustration of a larger point. The “fact” that Pearce chose to dissect was Costanza’s estimate that the world’s oceans have what Costanza called a “cultural value” of $2.5 trillion; or $76 per hectare.

Costanza and his team defined cultural value as what we’re “willing to pay” to preserve oceans for cultural reasons. We might like to preserve oceans for cultural reasons because we like to windsurf, for example, or because we want to live in a beachfront house and marvel at the open sea. Costanza and his team did not calculate the $76-per-hectare figure by asking the entirety of the global population what we would pay to preserve the cultural value of oceans. Instead, they did the next best thing, which was to see if such a figure exists in the research literature. Fortunately for them, it did, which meant that the figure could be relied upon, if not as the last word on the subject, then at least as a first-order estimate.12

Pearce, though, was skeptical. It is possible that a wealthy person living in a rich country might be prepared to pay $76 for the right to windsurf on a hectare of ocean. Alternatively, a poor person living in a poor country might just be willing to pay $76 to preserve a hectare of ocean if jobs depended on it. But the data isn’t clear. We don’t really know, because most of the world’s 7 billion people haven’t been asked.

Pearce said it was illogical to produce a value for the whole world, just by multiplying $76 by the total surface area of oceans (36 billion hectares). It might be possible to calculate a value for an individual area such as the Gulf of Mexico, or Dubai Creek, or Lewes on the English south coast. But it is unlikely that inhabitants of each of these places will all be willing to pay $76 per hectare. Some might be willing to pay more. Others would pay less. Simply taking one number ($76 per hectare), pretending it represents every part of the world, and then adding it up lots and lots and lots of times produces meaningless results and is plain wrong, according to Pearce. “If the oceans were to vanish completely, does anyone imagine that $2.5 trillion would compensate people for the cultural value they would lose?” he asked.13

There was one other issue that agitated the mainstream economists even more than a potentially ropy statistic. Economists define GDP as the sum total of output, or expenditure. That implies, to an economist at least, that GDP cannot be exceeded. The logic behind this argument is as follows.

Suppose that my total wealth is $1,000. I cannot then turn around and say, “Oh, and by the way: I’m also worth $1,500.” That would be illogical to a mainstream economist, and there is a kind of internal logic to the argument. If I’m worth $1,000, then I cannot simultaneously be worth $1,500. By the same analogy, if global GDP in 1997 was $18 trillion, then it couldn’t also be $33 trillion. Even if environmental services were factored into the total, world GDP would still be $18 trillion. What the economists were also implying (though not saying openly) is that environmental services were very likely a tiny, tiny fraction of what Costanza and his team were claiming.

Robert Costanza was angry when I put these concerns to him in an interview.14 All of GDP, he pointed out, is worked out in exactly the same way. National statistics offices take a sample value for, say, business investment or consumer spending and then use this sample to calculate a national figure for the whole economy. GDP is not calculated by counting every single trade or every single monetary transaction. The technology today probably does exist to be able to record every such transaction, but GDP doesn’t use it; GDP relies on sampling methods. “One can of course argue that all macroeconomic accounting is flawed in this respect,” Costanza says.

Especially irritating, however, were the claims about inaccuracies in valuation methodology. Costanza points out that ecological economists also have major problems with the idea of valuing an environmental service on the basis of what we would be willing to pay to keep it. But he says his team used it because it is the system that most existing research relies upon. “We cannot be faulted for violating ‘basic economic principles’ by following the standard practice.”

Costanza is also frustrated at Pearce and others’ claim that GDP cannot be exceeded. For Costanza, the whole point of valuing nature is to show precisely that GDP undervalues a nation’s true wealth and that it is incomplete as an indicator by ignoring natural capital and ecosystem services. In a response published alongside Pearce’s Environment magazine review, Costanza wrote, “Unlike Professor Pearce we do not believe that there is any one right way to value ecosystem services. But there is a wrong way, and that is not to do it at all.”15 Though it is fair to say that Pearce ended his review by saying that although he thought the work of Costanza and his coauthors to be “deeply flawed,” its intention was correct: “To show all of us just how valuable the natural world is. That clearly touches a chord with the many people who care about what is happening to the planet.”

Although this dispute may appear to be an argument on the technicalities of valuing nature, at its heart it was about something a good deal bigger. This was a battle over the right to set the rules for how economies are to be valued. Mainstream economists, even those with an interest in the environment such as David Pearce, are the guardians of their discipline, its rules and its traditions. The newer group of ecological economists had violated the rules of the group to which they wanted to belong and had to be shown their place. They call themselves economists, David Pearce seemed to be saying, yet they show disloyalty to its intellectual traditions.

Robert Costanza and his colleagues in ecological economics aren’t necessarily wrong, though somewhat naively they thought that sticking to the same operating principles as mainstream economists would make their conclusions more acceptable to the doubters. Instead, they found themselves at the mercy of the kind of rhetorical attacks that influential academic social scientists are practiced at. It’s a class act that attacks you for not adhering to a higher standard than that used by everyone else in the industry.

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In spite of the controversies—indeed, perhaps because of them—the Nature paper put ecological economics and Robert Costanza in a leading position to influence the debate about the problems with GDP and how to solve them. However, publication in Nature could very easily not have happened. In fact, Costanza and his team were lucky that things didn’t turn out differently.

Scientific research papers that appear in the top journals, such as the LancetScience, and Nature, need to fulfill a number of conditions. First off, the discovery or invention being claimed has to be original. Next, it must be something that is significant for the widest possible audience of scholars and not just technical experts; and last but not least, the work has to be technically sound, meaning there must be no errors in the calculations.

In scientific publishing there’s an extra unwritten convention, a sort of code of practice that anyone who publishes in the top journals is meant to know. Editors at the leading journals compete for the best ideas and the top talent just like elite sports teams. That means if you’ve submitted your manuscript to, say, Nature, then you cannot, under any circumstances, ever, ever send it to Nature’s great rival, Science.

Only it seems that no one told Costanza.

The previous year, in 1996, the Costanza team chose initially to send their $33 trillion estimate, not to Nature, but to its Washington, DC–based rival, Science. And unbeknownst to NatureScience rejected it for publication. Had Nature’s editors known, they, too, would almost certainly have turned the paper down and it would likely have ended up in a more specialized or lower-tier journal. The global media fanfare and ensuing scholarly debate would have been less, and the paper’s longer-term impact much diminished.

So what happened?

Approaching Science before Nature made sense for Costanza. At the time he was based at the University of Maryland. The journal had earlier sent a reporter to cover a scientific meeting that Costanza had helped to organize in the buildup to the big paper. So when the final draft manuscript landed on their desks, Science’s editors would have had a good inkling of what was to come and that it would meet their criteria. The $33 trillion finding was certainly original; it was also saying something of interest to more than just economists and environmental scientists. The only question that the editors weren’t sure about was the technical one: Was the paper technically sound? And it was on that question that events took a different turn.

Manuscript in hand, Science’s editors quickly moved on to the next step, which is to send the text out for peer review—sending it to other experts in the field, who would judge the research for originality, wide interest, and technical merit. Sensibly for a paper that covered more than one discipline, the editors chose both economists and ecologists as reviewers. They would have been expecting some criticism for a text claiming to be a world’s first. But they couldn’t possibly have expected what was to come.

One reviewer, likely an economist (reviewers are by convention anonymous) questioned the whole point of monetary estimates for nature. “Can I purchase [them] and do as I like with them?” he asked sarcastically. He added, “There are perhaps two immediate reactions: foolhardy or brave. Unfortunately, I believe the former is more appropriate. Overall, I believe this paper is interesting as an example of notable individuals feeling they must take the monetary valuation approach to such extremes but is scientifically ill-founded.”

Another reviewer said, “Setting aside the issue of whether this is a useful approach, the undertaking suffers in several ways: false precision . . . severe methodological problems . . . and general lack of rigour and intellectual value lends the effort an air of unreality.”

Rocked by the severity of the criticisms, Science’s editors, embarrassed, felt that they had no choice but to reject the paper, offering no right to appeal.16 Costanza wasn’t one for giving up, though. Weeks after Science’s faxed rejection, a revised manuscript landed on the desk of an editor at Nature’s offices in central London, overlooking the Grand Union Canal. As with Science, Costanza’s manuscript was sent off for peer review; only this time the comments that came back were more favorable.

“It seems to me that this paper does deserve publication,” said one reviewer. “I could find no major technical errors.” Another reviewer was equally gushing—remember, these are scientists; praise doesn’t come easy: “This is a huge effort to tackle an appropriately large subject. It makes for compelling reading. I congratulate the authors on their approach.” This reviewer, though, did sound a note of warning for what was to come. “No doubt there will be much nit-picking about particular numbers. As in the largest entries the paper provides a target at which others can shoot.”

The paper, “The Value of the World’s Ecosystem Services and Natural Capital,” was duly published by Nature in its May 15, 1997, edition.

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Costanza and his colleagues got to publish their estimate of what GDP would look like if it were to be calculated in a different way, and the rest of the world got to hear about it. Because of that, governments are using the methodology Costanza’s team used to value environmental services all over the world and have, over the intervening years, been filling in the gaps in the original analysis. The fact that ecological economics alone now has 2,000 scholars from more or less a standing start is no small achievement. And that includes many mainstream economists too.

Thanks largely to Costanza and his colleagues, mainstream economists are more likely to accept that unless the environment has a price tag, unless it is valued, the world will be forced to pay a lot more to replace it.

In the next chapter we will meet one of them.