2004 FENNER CONFERENCE ON THE ENVIRONMENT

Richard Denniss is Deputy Director of The Australia Institute. Before taking up his current position he was Chief of Staff to Senator Natasha Stott-Despoja, then Leader of the Australian Democrats. He was also employed as an Economics Lecturer at the University of Newcastle. Richard's research interests centre around the design of market regulation, particulary in the areas of the labour market and the environment.

Economics and the population-environment debate
by Richard Denniss

Session 3: Questions/discussion

Economics is basically about maximising, subject to constraint a first-year definition of what we do in economics. The problem is that in what most people understand as economics there is very little discussion of what it is we are trying to maximise and what the constraints are. So I am going to talk in the first five minutes about, basically, some of the mistakes that economists make in terms of the population-environment debate, and I will then talk briefly about some of the things we might be able to do about that.

I guess my overall contention, my take-out message, is that economics could be very useful for the population-environment debate, but it is actually not at all useful at the moment as it is practised. The reason for that concerns maximisation under constraint. When it comes to environment and population, economists see population as largely exogenous to their models. Population comes in from elsewhere, it's data. We don't think about it. Malthus thought about it in the 18th century; we don't think about it any more.

On the constraints, the environment, we say, 'The population? Well, that's not us. What about the environment? That's not us either, sorry. That's external to the debate.' So we say that population is exogenous and the environment is external. Why is it external? When the rules got drawn up, historically, about property who owns what no-one codified a whole bunch of things. 'All the fish in the sea' was meant to be a large number, not a matter of time. That is, we can catch them now but the law of the sea says everybody owns the fish in the sea: knock yourselves out, catch as many as you want. Economists say, 'Well, that's obviously a problem with policy, a problem with property rights not our problem.'

So economics, in terms of maximisation and constraint, what you really have to understand is that the debate about what to include in an economic analysis is subjective. The debate about which things to treat as included in the analysis and which things are external to the analysis is up to the person doing the analysis. Many economists, I would say the vast majority, take it as given that the things that should be included in the analysis are the things that have already been codified as property rights. And the things that lawmakers haven't got around to fixing? 'Well, that's not my problem to solve.'

That should not be a big problem if, when people said, 'Well, maybe it is time we said who owns the fish in the sea, maybe it is time we looked at who owns the air,' economists would keep their mouth shut. But they don't. You will find economists who will come out and say, 'It will be bad for "the" economy' whatever that is 'if you include fish in the sea, if you codify who owns that. It will be bad for "the" economy if you start trying to put a cost on air pollution.' So they get it both ways. This is the real trick with economics.

On the one hand we say, 'Hey, we're just a science like any other science and, you know, we can't include everything in our analysis. We choose to include these things in analysis because society chooses to include these things as law. So it is up to you to decide what we should worry about.' But then if 90 per cent of you put up your hand and say, 'We're okay with paying more for electricity if it comes from renewable sources,' you will find a whole bunch of economists who will step up and say, 'Hey! Don't be doing that. That would be bad for the economy.' So we economists get to be simultaneously the dispassionate scientists that look at 'the' analysis, and also political agents that play a very active role in the debate, saying what should or shouldn't be included.

I am only going through this quickly, obviously, but I do suggest that you don't have to know much economics to know bad economics when you spot it. And the problem with so much bad economics is that it is very good rhetoric. Often people make, from my point of view, the mistaken statement that we are run by economic rationalists these economists out there telling us what we have to do. That's rubbish. We are being run by very clever politicians, who use economic rationalists to pitch an argument to you, the public, in a way that you either don't understand or don't know how to rebut quickly and in dollar terms. The economic rationalists shape the debate in a way that excludes people just as effectively as it excludes forests and air. So public debate, public discourse not that that has got anything to do with economics, because economics is a science is very effectively controlled, once again, by this group of economists.

But don't think they are the ones making the decisions. If you think the world is run by economic rationalists, then why did we just give $600 million to sugar farmers? Why are we talking about giving hundreds of millions of dollars to the car industry I am not pro or anti the car industry yet if it is research into renewable energy, 'Sorry, no money for that.' These are political decisions. You won't find any economic rationalists jumping up and down saying, 'This is an outrage,' because it fits the political agenda. I know my brief here is to talk about economics, but I really think that the language of economics and the language of public debate about economics is too closely linked to politics, and I think that the more people who understand that, the better. If you want to read a book on it, read The Rhetoric of Economics, a wonderful book.

Now let's talk a bit more about population, the environment and economics. What can we do about these things? One of the main problems is that we talk about economic growth as being 'the' objective, not just for economists but increasingly for society. John Howard has said on numerous occasions, 'Maximising the rate of growth is the most important objective of my government.' He has said it again and again and again. Why? Economic growth not economic growth including expenditure on health, education and things we value, but economic growth full stop, all things equal.

Well, unfortunately, by setting things up in this way I will go back to the very beginning, when we said that economics wants to maximise something, subject to some constraints the thing that we apparently want to maximise is economic growth, and that is just given as a statement of the obvious. Subject to some constraints? Well, the main constraints that economists worry about are shortages of labour and capital. Environment is not on that list of constraints for 90 per cent of people who are interested in economics. And what are we trying to maximise? Economic growth. But, unfortunately, there is not a lot of empirical evidence that having more economic growth directly leads to increased happiness or wellbeing. So, presumably, we are not terribly interested in solving a social problem with economic growth; it turns out we are trying to solve an economic problem with economic growth.

My boss, Clive Hamilton, has written about this in his book Growth Fetish, so I won't go into it in too much detail here. But the point is that for economists, the thing we want to maximise is how rapidly we are expanding. So we can, by definition, never have enough, which goes back to another important assumption that economists make, which, as you hear in the first lecture you do in economics, is non-satiety. We assume that rational people, you and I if we are rational, experience non-satiety: more is always better than less. We can never have enough.

So we have got an economic system which explicitly is just trying to make more and more stuff. And it doesn't say whether there is good stuff or bad stuff, it just says there is stuff and the more of we've got, the better. The only constraints we have to worry about, by convention there is nothing in the textbooks that says this is a good idea are labour and capital. We don't have to worry about a shortage of fresh air. We don't have to worry about a shortage of clean water. We don't have to worry about environmental impacts. They are external to our analysis. And if you try and make them internal to our analysis, if you try and pass a law to make us internalise them, we will come up with a million reasons why that is a bad idea.

In terms of policy, I think what we have to realise is that economists have nothing to tell you about what we should be doing. The purpose of economists is to figure out, 'If you have got a finite amount of stuff, and you want some of this, here are some ways of organising your stuff to get what you want.' When we go and ask economists, 'What do we want?' they haven't got the answer. Two thousand years in Western philosophy, 'What is the point of life?' and in the last 10 years we have figured out that it is economic growth. A simple solution but probably not a very effective one.

So there is no reason why economics can't have a lot to say about population and the interface between population growth and demand for resources, and there is no reason why it can't just focus on those resources. But economists have not looked at the problem in that way I'm not saying none have, of course they have, but when we talk about modern economics that is not what they do and in turn the answers we get are entirely disengaged from the debate that we are having here today.