Wednesday, February 23, 2011

Are We Consuming Too Much?

Before posting Malthus Part III having a brief discussion on sustainability would be good. Today in class we will discuss the Arrow et al article titled, "Are We Consuming Too Much?".  The article appeared in the Journal of Economic Perspectives in 2004. Interestingly there are many ecological authors on the paper with the economists ---a combination rarely seen. The authors write:
"This paper, the outgrowth of discussions among a group of ecologists and economists, offers and analysis that we hope will go some way towards reconciling the conflicting intuitions. The binocular vision that can be obtained from using both ecological and economic insights raises questions that might not occur in either viewpoint alone."

The paper was easy to read and the combination of ecologists and economists proved fruitful. For example, in the reading I learned more about the levels of resource consumption and thoughts about the negative impacts of such consumption. But, also it was satisfying to see big ecological names listed as co-authors admitting there are trade-offs between environmental and non-environmental objectives. In fact, the notion of tradeoffs are central to the models they present: intergenerational social welfare functions.

The utility at any point in time is determined by the "productive base" which are three different capital assets. The authors write, "The capital assets include manufactured capital, human capital, and natural capital. The productive base also includes the knowledge base and society's institutions." From there the authors identify two criteria by which consumption might be judged to be excessive:

  1. The Maximize Present Value Criterion: Social welfare from consumption can be lower today; but, it must be offset by an equivalent amount of future utility. Tradeoffs can be made, but, they must be compensated for. 
  2. The Sustainability Criterion: Social welfare must not decrease over time. There is no unique consumption path to adhere to this rule. Society makes tradeoffs on manufactured, natural, and human capital such that there is no decline in utility from Period 1 out to the end of time.

Then, the authors extend the model by asking the following two questions. First, what happens if there is a changing population? Second, what happens if there is technological change? By making some further assumptions in their theoretical model the authors then empirically make the case that Genuine Wealth is increasing for many of the wealthy nations, but, decreasing for poor nations.
Put another way, rich countries are consuming at sustainable levels; but, poor countries are consuming too much.

You might be thinking this quite odd. How can poor people be consuming too much!?! The creation of wealth is slower than the increase in population so mechanically there will be lower per capita genuine wealth. However, the authors cite three other reasons why poor countries A) Consume too much and B) Do not create more wealth.

  1. Insecure and poorly defined property rights - Where there are poorly defined property rights wealth is difficult to create. Imagine that you owned a store but you didn't know whether it would be taken from you by the government or some thug. Would you make investments that are necessary to increase wealth? Also, with natural resources when there are not clearly defined property rights there may be a tendency to overconsume. (Clearly this is not always the case)
  2. Failure of the market to incorporate negative externalities - If the market does not incorporate negative externalities such as various forms of pollution to water, earth, and air then there will be an over-production of pollution. Some pollution is necessary for the production of goods and services; however, these could be minimized if we were better able to account for the negative impact on natural capital.
  3. Government Subsidies - If rich countries are providing subsidies to agricultural industries (which are the bread and butter of many poor nations) then they are artificially lowering the price of home agriculture compared to overseas agriculture. This disadvantages those poor countries since they are competing on an uneven playing field.

There is a growing concern for our impact to the environment. This paper is an admirable attempt to discuss the tradeoffs between social and environmental concerns. The environmental questions are still difficult to answer because they face the same difficult question they always have: How do you value a non-market good? What does this mean for us as Christians? We are called to care for the Earth ---to be good stewards. In our personal lives of consumption we can certainly make alterations; but, for these larger questions: What ought we do? I would love some feedback.

I'm not normally an advocate of many policy prescriptions; however, agricultural subsides strike me as an important policy that should be repealed. These subsidies are the largest corporate welfare program out there, they disadvantage wealth creation in poor countries, and cause them to allocate resources in ways that are environmentally destructive.

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