The dismal science

by Geoff Hart

Previously published as: Hart, G.J. 1990. The dismal science. Canadian Forest Service, Sault Ste. Marie, Ont. Staff Newsletter, February:12–14.

Economics has been called "the dismal science", in part because its practitioners have never been hesitant to make gloomy predictions about our future. Take, for instance, the current debate among economists about whether or not our economy is due to slide into a recession (the euphemism used for a depression). Another explanation for the "dismal" epithet is perhaps that economists have traditionally had a dismal track record when attempting to explain observed reality, other than through hindsight.

The word economics comes from the same root as ecology, namely "eco" (from the Greek oikos, meaning one's house, habitat, or living environment). Although both words share a common root and, at least originally, a common point of reference, in the past century or so the two words have become almost entirely antithetical. That is, the side-effects of policies based solely on the models and predictions of economics have become so severe and unavoidable that the faint warning cries of ecologists are finally being discussed by economists for the first time. Ecology and its complex, poorly understood processes, have always been considered by economists to be an "externality", something that could be safely left out of the equations that the economists use to explain, with 20:20 hindsight, why their earlier equations failed to describe reality. This is an example of what computer scientists call the "GIGO" law: garbage in, garbage out. If you don't start with a good set of data, you'll only arrive at a good result through random chance.

Economists have always included the cost of inputs (e.g., raw materials used in manufacturing) in their analyses, but until very recently, have not considered the environmental component of such inputs to be worthy of consideration. The reason traditionally given for this exclusion, in those few cases in which the economist actually considered the environment worthy of modeling, is that economic models are complex enough already without incorporating ecological variables that, after all, aren't well understood by ecologists themselves. Although correct in a very simplistic manner, this argument is easily undercut by subjecting it to the same standards used in economic modeling. Many simplifications of complex situations are made in economic models, to the extent that the truth of the situation is lost in a welter of overly general variables and assumptions. For example, a friend of mine who recently completed his PhD in economics at the University of Toronto presented a talk on his thesis, which boiled down to the following conclusion: if the market price of a forest product rises, the companies that produce the product will attempt to sell more of the product, assuming that their own unit costs don't rise as a result of the increased sales. In short, if someone wants to increase your profit margin, you'll be happy to comply. This sort of obvious, simplistic conclusion was attained after three years of research and statistical analysis, and although a variety of other gems of useful information were concealed in the thesis, much of it was made no more useful because it was too watered down by the time it emerged from the equations.

To say that it is shortsighted to ignore externalities in an economic analysis should go without saying, yet clearly it needs to be said. An inevitable consequence of such shortsightedness has been that we, the public, are now left to deal with a broad variety of externalities that were ignored despite loud warnings from environmentalists and other ecologists who clearly foresaw the problem, but who weren't consulted on how to include their warnings in the economic models. For example, we are rapidly running out of room to store the heaps of reeking disposable diapers that are an inevitable and unavoidable externality of the impartial economic planning that gave rise to them; as a result, these nonbiodegradable monuments to our urge to cover the globe with ever more humans will quite probably outlast our current civilization. (This statement is based on the existing data on the lifespan of a typical disposable diaper, estimated to be around 300 years, and on the assumption that we show no signs as a civilization of lasting longer than the Roman Empire, which existed for as little as 400 years, depending on how you choose to assign starting and ending dates.)

Pollution, the greatest externality of all, has never been factored into the production costs of most products. Even a simplistic economic analysis can include a cost estimate for cleaning up and disposing of a product and can include this in the market price of the product. The argument against doing so is that this would raise the cost to consumers; however, the reality of the situation is that consumers purchase the products at artificially low prices, and pay the true price through our taxes when it comes time to clean up the mess. The people responsible for the pollution that will arise from the recent tire fire in Hagersville will never pay even a fraction of the cleanup costs; you and I will, for years to come, when our annual tax bills come due. If we must pay for the cleanup, I for one would prefer to pay up front, so I know what I'm paying for and have some incentive to solve a problem before it becomes a disaster.

I have a radical proposition for you to consider. At the present time, large companies pay for the cleanup costs of environmental damage they caused because we didn't pay attention to regulating them properly in the first place. When a large company pays a multi-million dollar fine to clean up some catastrophe, our elected representatives fine the company, which economists consider to be an individual in its own right. (Hence the misleading phrase "corporate citizen".) The end result is that the company loses profits, and if the losses are severe enough, jobs of people who had no responsibility for the accident are lost. I propose that the chief executive officers of that company, who made the decisions to skimp on precautions and environmental protection, should be made responsible for the actions of their company, and by imposing jail sentences rather than fines. In this way, there is strong incentive not to let accidents happen; under the current system, those responsible for a company's disasters usually don't even suffer pay cuts if they foul up. Obviously, there would have to be some protection built in to shield those who truly bore no responsibility for a disaster, but as with the rest of our legal system, some means of punishing the guilty must be established.

Another example of ignored externalities involves agriculture. Some recent estimates for the American midwest state dthat as much as a bushel of topsoil is lost to erosion for every bushel of corn that is harvested; fertile soil that took millenia to form is being lost at such a rate that it may take millennia to replace the soil. Even if these estimates are exaggerated, the figures are alarming evidence of yet another externality that has never been adequately factored into the cost of our food supplies. Thomas Malthus, one of the first true economists, pointed out clearly that this sort of thing can only be ignored for so long before someone has to pay; it may not be our generation, but do we really want to pass the bill on to our children and grandchildren? I've just become a father, and I certainly don't.

Economics, despite compelling evidence to the contrary, still considers itself a science. Economists still, by and large, refuse to conduct any serious analysis of ecological "externalities" in most of their work, in part because this would require consultations with other experts whose advice they have traditionally ignored. If this sort of economics is considered to be science, then give me astrology any day... at least astrologers are easily seen for the false prophets that they are.

[A look back from 2005: This one holds up pretty well as a rant, though clearly there has been 20 years of progress in addressing the problem of externalities. What has not happened, apart from isolated instances, is to include the disposal cost in the sales price of every product.—GH]