The myriad theories that underlie the ever-expanding field of economics are essentially positive in nature; they are descriptive and subject to hypothesis testing.
For example, in the sub-field of environmental economics, economic theory predicts that open access resources will almost always be exploited to ecologically unsustainable levels, that resource scarcity leads to higher prices which leads to technological innovation and substitutes, and that in the short-run the demand for highly inelastic natural resources such as gasoline will not change very much even if the price changes dramatically.
However, as soon as we enter the world of public policy, economic models and their implications are riddled with normative assumptions. Much of the distrust that many environmentalists have towards economics is based on their belief that economists often hide their value judgments behind highly complex mathematical models, instead of being forthright about their normative assumptions. I think there is some truth to this.
Some examples of areas where normative elements are unavoidable in economic analysis are the following:
1. Efficiency v. Equity
By definition, economics is a utilitarian discipline, and efficiency is defined as those policies or outcomes which maximize social welfare. Besides many of the normative elements in how social welfare is measured (more on that below), efficiency says essentially nothing about the actual distribution of costs and benefits. Economists often tend to emphasize the efficiency arguments and downplay distributional concerns, while in the policy world people are often more (or equally) concerned about winners and losers and issues of fairness than whether a given social “pie” is maximized. The result of this mismatch in priorities is that often economists and policy makers talk past each other and opportunities for a more robust discussion of the trade-offs between efficiency and equity is missed.
An example of this trade-off can be observed in the heralded sulfur dioxide permit trading program of the 1990s. Efficiency arguments dictated full and open pollution permit trading among all of the coal-fired power plants in order for abatement to occur among the plants with the lowest sulfur abatement costs. The permit trading regime did, in fact, result in amazing reductions in the cost of SOX abatement, but at the same time, to a high concentration of coal use in certain regions, which created toxic “hot spots” (mostly in upstate New York), and a huge amount of litigation followed. (In all fairness to the architects of this very successful policy, it was essentially the first of its kind; from now on economists have no excuse not to pay serious attention to distributional issues in future permit-trading regimes.)
In addition, in all types of pollution permit regimes the initial allocation of permits entails normative choices. In the case of the SOX program, the permits were grandfathered to coal power plant users, which in a sense rewarded bad behavior because the dirtiest plants received the most permits. Auctioning the permits would have been both the most efficient and some would say the “right” way to allocate them, but politically this would have been much more difficult.
2. Cost-benefit analysis and discounting
Cost-benefit analysis is one of the most ubiquitous methods employed in environmental economics, and its normative underpinnings are huge. First, researchers must determine what elements should fall under the scope of the CBA since it is almost always impossible (due to cost, time, and the state of scientific precision) to measure all of the effects of a given policy. Yet, what to include and what not to include can dramatically alter the findings.
Perhaps even more influential in the ultimate findings of any CBA is the use of a particular discount rate for the measuring costs and benefits into the future. Many economic theories have been developed to justify an appropriate discount rate, yet there is no consensus as to a “correct” rate for environmental projects. Some advocate the market interest rate, others a slightly lower “social” discount rate, others a rate of zero, while some even suggest a negative discount rate for particularly unique environmental resources. Anyone who is familiar with exponential rates of growth and decay knows that such a wide range of possible values translates into an even wider range of total values assigned to the costs and benefits of an environmental policy or project.
3. Anthropomorphism writ large
A fundamental aspect of economic theory that is virtually unchallenged by any economist is that the ultimate source of all value rests with humans. To the extent that we can measure the values that environmental resources provide human beings, whether indirectly or directly, we can then compare different policy outcomes and make informed policy decisions. According to this logic, environmental resources (and all non-human beings) have no intrinsic value apart from what humans assign them. This is something that many environmentalists find so disconcerting.
According to economic theory, if there is a species that has no value in terms of the ecological services it provides and there are no humans who happen to care about it, it has a value of zero. In addition, the value that humans gain from hunting or killing animals for sport or food is automatically counted as a positive source of value, while the suffering of the animals (apart from the suffering caused to humans who care about the animals) is zero. One doesn’t have to be an animal rights activist or a strident environmentalist to feel a little uneasy about this.
I am not sure if economics can or should try to transcend this anthropomorphism, but environmental economists should, at minimum, be clear that this is what their theories and methods dictate, and perhaps think more deeply about whether given recent advances in biology they are comfortable continuing to ignore the interests of the non-human world, apart from how they influence human concerns.
There are many additional examples of where economic concepts applied to real-world environmental problems are laden with value judgments. To the extent that these can be made explicit and the public engaged in the debate over these assumptions, I believe economics will be more warmly embraced. It will also help to deepen economists’ own understanding of their value systems and the values they advocate, and likely make for better public policy as well.
J.S.
