Environmentally Destructive Land Conversions: The Inadequacy of Microeconomic Correctives

In the article preceding this one, it was established that the root of continuing degradation of the environment through land conversions was the quest for immediate profit. Accordingly, it was concluded that the quest for immediate profit must somehow be checked. The ecological economist, Herman Daly (former senior environmental economist, from 1988-1994, of the World Bank and co-founder, with systems ecologist, Robert Costanza, of the International Society for Ecological Economics) tells us that there are basically two ways to do this: the microeconomic way and the macroeconomic way. This article devotes itself to a discussion of the microeconomic way of checking environmentally destructive land conversions and why it must fail.

The microeconomic approach to restraining the incentive for immediate profit involves making market prices reflect their true social costs (Daly 1996: 45, 90) through a Pigouvian tax calculated through cost-benefit analysis and assessed on the profit. Briefly, the calculation involves first calculating the environmental impact and then subsequently evaluating the impact as a cost to be avoided or to be undone (Daly and Cobb, Jr. 1989: 141). In this way, market prices would either prevent the incidence of environmental impacts through restriction of production and consumption from higher costs or make them reversible through surpluses from such production and consumption.

Unfortunately for the microeconomic, cost-benefit approach, which is championed by conventional (neoclassical) economists, the branch of computational mathematics and computational physics called nonlinear dynamics (popularly known as chaos theory) tells us that the qualitative transformations constituted by environmental degradation require strictly infinite information for their calculation. Indeed, it is not clear if even infinite information would suffice. Accordingly, cost-benefit analysis cannot possibly yield the correct calculations and what conventional economists do is in fact implicit admission of this conclusion: they contract their time-horizon of prediction in cost benefit analysis so that it is possible to avoid non-computable uncertainties in their calculations and rather confine those calculations to computable risks.

The trouble with such a procedure is that it is precisely the lesson of nonlinear dynamics that long-term prediction of system behavior cannot be built up from repeated short-term predictions (Stewart 1995: 107-112); nor can global prediction be assembled from particular, local predictions (Barrow 1991: 194). Pretending otherwise, as mainstream economists do, is inviting unexpected effects. As ecological economist, Charles Perrings (1987: p. 124) put it:

[T]he fact that an individual agent may declare the future [beyond a certain time horizon chosen for analytical convenience] to [effectively] have a zero weight does not mean that future effects of present actions will not occur. All it means is that they will be unanticipated…

Worse, the unanticipated effects are apt to be disruptive simply because there are more ways for things to go wrong than to go right.

Thus environmental degradation continues unabated, not in spite of, but precisely because of this computational pretense by economists in cost-benefit analyses that cannot possibly yield the correct market prices to either prevent or undo environmental degradation. (Ostensible successes in reversing degraded land do not take account of environmental degradation caused elsewhere through the mobilization of resources required in the reversal of the environmental degradation.)

It can be seen from the foregoing discussion why microeconomic measures must be powerless in containing, let alone reversing, environmentally destructive land conversion. We are therefore left with macroeconomic measures that intervene by specifying the collective, future boundary conditions compatible with environmental health at the outset and letting market transactions operate within the constraint of those boundary conditions.

Such macroeconomic interventions are precisely the sort of intervention that would be authorized by nonlinear dynamics because nonlinear dynamics effectively tells us that the whole must be greater than the sum of its parts (Barrow 1991: 194). Accordingly, organizing principles must move from the whole to the parts if viability is to be insured. In the concluding article of this series, we discuss just such an organizing principle embodied in a particular macroeconomic intervention.

(For the citation references mentioned in the text, see the following: Barrow, John D. 1991. Theories of Everything: The Quest for Ultimate Explanation. London: Vintage, 1992; Daly, Herman E. 1996. Beyond Growth: The Economics of Sustainable Development. Boston: Beacon Press; Daly, Herman E. and Cobb, Jr., John B. 1989. For the Common Good: Redirecting the Economy Toward Community, the Environment and a Sustainable Future.  Boston: Beacon Press; Perrings, Charles. 1987. Economy and Environment: A Theoretical Essay on the Interdependence of Economic and Environmental Systems. Cambridge: Cambridge University Press: Stewart, Ian. 1995. Nature’s Numbers: Discovering Order and Pattern in the Universe. London: Weidenfeld and Nicolson.)