2004 FENNER CONFERENCE ON THE ENVIRONMENT

Session 3: Questions/discussion

Paul Monk: Richard, I was left a little unclear, after your talk, about the relationship between economic prescription and policy making, not least by your allusion to the sugar subsidy, where you seemed to be implying that it was not a good thing to be giving the subsidy. I suppose as an undergraduate, one of my first sobering introductions to economics was indirectly through some history, looking at the debates in the Soviet Union in the 1920s preceding forced collectivisation. What struck me forcefully there is that the economists, despite the policy constraint that collectivisation was the way that the government was going to go, nevertheless did a lot of careful work, saying, 'Well, if we are going to go down that path, these are the rational constraints. We need to proceed slowly, make sure we have got the agronomists, the managers, the fertilisers, the tractors,' and it was Stalin who said, 'Sweep it all aside. We are going to do it overnight.' The result, of course, was a catastrophe.

So it seems to me that there clearly is an interplay between the two. I was left a little uncertain from your remarks as to how you see those two working together. Perhaps you could expand on that.

Richard Denniss: Obviously, I tried to say a lot quite quickly. I guess the point that I was trying to make: I will go back to what you were talking about this morning with decision making, with the tic-tac-toe thing.

If you have ever seen a cabinet submission, you would know it is not terribly complex. It is very, very simple: one page, two pages, 'Here it is, who wins, who loses, for or against.' The point that I was trying to make is that while people think we live in this world where economic rationalists dictate that schools will look like this and hospitals will look like that, the exact opposite happened in assisting the sugar industry: '$600 million, marginal seat, leave me alone.' The decision-making process was not terribly complex, but the point I was trying to make was that it was not terribly well influenced by economics.

If I were giving another paper on industry assistance, I would be actually making the opposite point. I have no problem with industry assistance at all, but what we need to have, to have good industry assistance for example, would be to admit that we do it, because we don't at the moment: 'It's wrong to pick winners,' 'Industry assistance is protecting dinosaur industries,' blah, blah, blah, 'Here's $700 million for you.' So we don't actually have a criteria approach to say, 'All right, everyone who would like money from the government, form a queue, state your claims, tell me what you promise, tell me how I will assess in 10 years' time whether you delivered or not, and then we will make a national policy decision as to which industries will get assistance or not.' I think that would be a great idea.

So economics, once again, could offer a lot to that process but it doesn't. At the moment, the way we assist industries is by who got it last year and who lives in a marginal seat. The point that I was trying to make there was a political one, not an economic one. We do not live in a world where pointy-headed economists in Treasury dictate everything that happens. That is far from the truth. We ship a pointy-headed economist out to explain what just happened, but there are a hell of a lot of decisions out there that don't look at all like good economics but we don't see that in society as an ongoing tension between multiple ways of making decisions. Economists are just very good front people for a whole bunch of decisions.

Chris Watson: I am a retired soil scientist. I am glad that Professor Withers is worrying about global warming, but perhaps he should be taking more of a precautionary principle regarding just what global warming is going to do to the Australian landscape and its agricultural production, rather than saying that we could have more people. Of course, he didn't say that Australia is still growing at one million every four years, which is not taking into account the precautionary principle. Others have said, as even Professor Wasson has said, 'Well, let's go back to 9 million if we don't have fossil fuels or fertiliser.' And there are world wars now in the Middle East over these resources. What will happen to the world's population, let alone our own, if we have extremely grave shortages of fossil fuel? It is propping up all aspects of this society.

Glenn Withers: What is happening in Australia for our own natural increase is that by about 2030 we won't be having more births than deaths, so any population increase after that, unless the Treasurer is more successful than I suspect he'll be in making families breed more, will be by immigration, in which case what you are doing is the very interesting issue that was raised earlier, of redistributing the global population pressure across the world rather than increasing the total pressure.

And that raises some interesting questions of the kind that my colleagues in the Australia Institute have addressed: if we bring people here rather than somewhere else, are we indeed causing a greater problem for the environment than otherwise? And it is a lot more complicated than you might think. That is, if you are bringing a Hong Kong business person into Australia, which has a better environmental regulation regime than Hong Kong does, you may actually be improving the world environment. If you bring here a refugee from Afghanistan who is living in a camp that is polluting water much more massively than even we pollute, you are improving the world environment. On the other hand, people are coming to a country in some cases where affluence is greater and hence fossil fuel use is greater.

It is a very complicated issue, and a simple ascription of population growth hence fossil fuel use, taking a purely nationalist viewpoint, is a wrong way of construing the global problems we have got.

Richard Denniss: There is another thing that is very important. I agree with what Glenn just said, that it is far more complex than some people assume, but in terms of economic growth and its relationship to population, you are right about energy use growing exponentially with population growth, but it doesn't have to be that way. About 10 per cent of the Australian population works in food, clothing and shelter, and the rest do stuff like I do. If we all want to start stamp collecting and use our massive salaries to buy stamps from each other at very high prices, you still get economic growth and you don't get the pressure on the environment that we have got at the moment.

I agree with some of your concerns but I think that, as Glenn said, it is far more complex. You don't have to assume there is a linear relationship between fossil fuel use growth and economic growth. It hasn't always been there, it won't always be there.

Tony McMichael: Glenn, you mentioned in one of your early slides that economics does have a problem with market failure with respect to aspects of natural systems, and I think a particular problem has to do with the consequences of the disturbance of natural systems over many decades, stretching out into the distant future.

I am just wondering whether economics is yet satisfactorily grappling with alternatives to conventional discounting, which I understand is really grounded in how we handle financial investments over decades rather than handling environmental changes that might extend over half centuries or centuries and involve, therefore, very different parameters and profiles of risks and costs.

Glenn Withers: I don't think discounting is the problem. That is, formally in economics the use of financial market discount rates: as in business decisions on investments, using discounted cash flow analysis: uses market rates and that would be inappropriate. But in public economics, which is half or more of what economics really does, the discount rate is a social discount rate which we then build in to, if you like, discount the private market rates where you have got social damage. So, in principle, government decisions should be undertaken with respect to a proper social discount rate that reflects damage to the society or the environment and can be taken account of: properly, cost-benefit analysis.

That said, even though that is the principle, I think the real deficiency in the economics is that that approach can work well for individual projects; it doesn't work well for systems. That is, the economics is very much built up from individual agents making decisions in their localised environment, and the cumulation of those decisions into switching-points and full systems and so on of the kind where there are thermodynamic laws with irreducible minima et cetera is not taken into account, not understood: not even understood properly for the economy, where there are a lot of system effects too. Otherwise, why do we have financial crashes which economists don't understand and can't predict, let alone try and understand and incorporate with natural systems?

I think one great way forward might be, for instance, that we economists might better understand even the economic phenomena if we listened more to people who understand systems better, as well as integrating the systems.

Alan Rich: My question is about the definition of ecologically sustainable development. There are two generally accepted models of ESD. One is a three-legged stool approach that we often hear about, and another is one I have heard Professor Lowe speak of: I don't know if this is original thinking: which is more of a concentric circles approach in which the economy is a subset of society, which is a subset of the environment. Very quickly put: they aren't compatible models, obviously. Which would you favour, and why? Or perhaps you have your own explanation.

Glenn Withers: I haven't heard it put that way before, but the three-legged stool wins out easily. The concentric approach implies hegemony of some particular perspective on the world. My whole starting point of analysis was that the world is best examined from a range of perspectives. To imply that one is dominant and the others are residual or subordinate is simply not going to work in terms of the way people are willing to think, unless we are equal partners in an enterprise. I think that motivationally, for future understanding of the world, to view some aspects of reality as subordinate to others is not going to work for understanding those realities and how they integrate. That strikes me as a tough approach, if what you are going to do is to declare something superior.

What becomes superior? Social scientists are going to declare social systems superior. In population equals environment, population is more important, whereas natural scientists, if you have to take that concentric circles approach, will say, 'Well, look, population is a subset of a broader natural order.' And once you are getting into that you are breaking back into the silos, the different perspectives on the world. I think forget the concentric stuff; let's walk on three legs for now while we can, and come back to that in a hundred years' time.

Ian Lowe: Glenn, I agree with you that a knowledge-based economy is the only way of reconciling a desire for continued growth with environmental sustainability. But leaving aside whether that is possible, how do we shift the economic discourse away from the traditional emphasis on our comparative advantage, which is in digging up and exporting large amounts of natural resources, or mining the soil to produce agricultural exports?

Glenn Withers: Well, two ways. One, it is not clear that it is to our comparative advantage: that's old economics or bad economics. We are a clever, educated nation. In fact, one of my great regrets as an economic historian is that we don't understand how clever we once were. We have lost that cleverness. We have become, as Barney [Foran] puts it, a dumb economy instead of a clever economy.

At the end of the 19th century we built clever cities based on service industry: yes, we were exploiting the land in an unacceptable long-term way, but most of us were not doing that. As Bob [Wasson] indicated before, most of us were actually bringing in each other's washing in a highly affluent way, and becoming highly democratic at the same time. It is time we reinvented that and moved into that sort of low-impact knowledge economy. It's a lovely way of life for most of us, for everyone who can get into it with the appropriate education and training, and we should make that something that is the precondition for all. On that basis we can have win-win solutions of the kind that I think I indicated. It is bad economics to think of comparative advantage as simply digging up and selling. I am not even sure it is factually correct, and certainly once you then also add in the social costs of that, it certainly wouldn't be correct.

Richard Denniss: I agree with Glenn. The problem is not economics, it is bad economics. Glenn and I, I think, agree on a lot of things and disagree on a few, but it's where the line is between good and bad economics. But what all honest economists will admit is that ignoring the environment is bad economics. Whether they choose to actually try and change that is up to them, but there is nothing in any textbook anywhere that says, 'Ignore the environment. It doesn't matter.' That's an assumption that people adopt. It is not a conclusion based on economics.

Anna Robinson: Some years ago, when I was studying economics a lot of the environmental and social issues were raised, and in a lecture theatre of 400 students the lecturer stood up and said, 'Economists are not social workers or environmentalists. If that's what you want to do, go and study it elsewhere.' Could I suggest that economics at university be forced to merge with some of these disciplines, so that there is no longer a plus or minus?

Glenn Withers: I would add one comment. That is bad economics, and unfortunately we don't have a profession that has accreditation for membership: which shows. Because we believe in the free market, anyone can call themselves an economist, as it were. But, equally, let me say that when I was invited here today one of the support staff organising the conference mentioned to me, 'Wouldn't it be nice if we could get more economists along to listen and learn a bit more science.' Let me say that it goes two ways. I don't imagine if somebody stood up in a physics lecture and asked about the economic complications and the social effects they would get very far either.