Taking the Dasgupta Review seriously (with an interview with Professor Partha Dasgupta)
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Commissioned by the UK Treasury in 2019, The Economics of Biodiversity: The Dasgupta Review was published in February this year, ahead of the Convention on Biological Diversity COP15. It is a 610-pages long review focusing on the economics of biodiversity, led by Professor Sir Partha Dasgupta, Professor Emeritus at the University of Cambridge, who has been supported by an Advisory Panel drawn from public policy, science, economics, finance and business.
The Dasgupta Review is an independent global review which has been prompted by a significant amount of evidence showing that in recent decades humanity has been degrading the most precious of all assets, Nature, at rates far greater than ever before. In fact, as it is noted in the Review, the last few decades of human prosperity have taken a “devastating” ecological toll: the demands of the global society far exceed Nature’s capacity to supply the “goods and services” we all rely on.
In the Review, the terms Nature, natural capital, the natural environment, the biosphere, and the natural world are used interchangeably. This is explained by the fact that the Dasgupta Review builds on six previous publications of Professor Partha Dasgupta (Dasgupta and Heal 1979; Dasgupta 1982, 1993, 2004, 2007 and 2019), each directed at a particular class of problems that belong to the economics of biodiversity.
The purpose of the Dasgupta Review
The Review convincingly shows that in order to decide whether the path of economic development nations choose to follow is really sustainable, they need to adopt “a system of economic accounts that records an inclusive measure of their wealth” (p. 5). As it is mentioned in the Review, the qualifier ‘inclusive’ means that wealth shall include Nature as an asset. Dasgupta draws on such assumptions as well as on previous documents (such as the so-called Bruntland Report) to set the following definition of sustainable development, used throughout the Review: the development that meets the needs of the present without compromising the ability of future generations to meet their own needs i.e. by bequeathing to its successor at least as large a productive base as it had inherited from its predecessor.
Arguably, a major goal of the Review is to have an impact on the diverse levels of communication and analysis that shape our understanding of how the economy works as well as the definition of sustainable development, for instance:
- on a methodological and analytical level of related scientific research;
- on the level of communication so to improve policy-making;
- on a social level, namely, on how individual citizens, households, politicians, professionals and entrepreneurs understand Nature.
In fact, the Review was published with an aim to construct “a grammar for understanding our engagements with Nature – what we take from it, how we transform what we take from it and return to it, why and how in recent decades we have disrupted Nature’s processes to the detriment of our own and our descendants’ lives, and what we can do to change direction” (p. 5).
The Review provides convincing arguments for economic progress to be interpreted to mean growth in inclusive wealth, which is defined as the social value (based on accounting prices) of an economy’s total stock of natural, produced and human capital assets. This, in turn, brings the Review back full circle to where it begins, which is the argument that just as the private investor manages her/his portfolio with an eye on its market value, the citizen investor appraises the portfolio of global assets with an eye on their social worth. According to the review, wealth maximisation in its various guises unites microeconomic reasoning with its macroeconomic counterpart.
Measures such as GDP are misleading when it comes to assessing sustainable growth
The Dasgupta Review suggests that the Gross Domestic Product (GDP) or multifactor / total factor productivity are no longer fit for purpose when it comes to assessing both the economic well-being and the economic wealth of nations. For instance, Dasgupta contends that GDP is “based on a faulty application of economics” that does not include “depreciation of assets” such as the degradation of the biosphere. From this point of view, the Review is reminiscent of the message contained in Robert F. Kennedy’s famous 1968 speech at the University of Kansas in which he was very critical of the application and use of the GNP as a measure of well-being in the United States: “too much and for too long, we seemed to have surrendered personal excellence and community values in the mere accumulation of material things. Our Gross National Product, now, is over $800 billion dollars a year, but that Gross National Product – if we judge the United States of America by that – that Gross National Product counts air pollution [Actually it does not count air pollution (an externality), but it does count activities which generate air pollution] and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl”.
Similarly, to quote from the Dasgupta Review: “erosion of natural capital usually goes unrecorded in official economic statistics because Gross Domestic Product (GDP) does not record depreciation of capital assets. Destroy biodiversity so as to build a shopping mall, and the national accounts will record the increase in produced capital (the shopping mall is an investment), but not the disinvestment in natural capital unless it commanded a market price” (pp. 109-110). One could here further suggest that depreciation is considered in the transition from Gross to Net Product and with reference to Income figures in the national accounts, but currently the focus appears to be almost exclusively on GDP, whereas GNP is hardly ever referred to or even mentioned in contemporary economic analysis.
The Review goes then on to argue that a focus on GDP leads to a focus on immediate consumption and immediate gross investment, with no attention to the multifaceted impacts on the biosphere. It concludes that inclusive wealth (that is, the social value of an economy’s total stock of natural, produced and human capital assets) should be taken as the right measure of sustainable prosperity, not GDP growth.
Recognising both market and institutional failures is paramount to changing path
The Economics of Biodiversity recognizes the fact that humanity faces an unprecedented need for radical change: continuing down the current path – where the global society’s demands on Nature by far exceed its capacity to supply – presents substantial risks and high levels of uncertainty for contemporary economies worldwide. According to Dasgupta, pricing distortions have led us to underinvest in natural assets and, instead, invest relatively much more in other assets such as, for instance, produced capital. According to Dasgupta, this is not simply a market failure, but should also be considered as a broader institutional failure: on the one hand, many of our institutions have proved unfit to manage the resulting externalities; on the other hand, governments almost everywhere tend to exacerbate the problem by paying people more to exploit Nature than to protect it, thereby incentivising unsustainable economic activities and the depletion of natural resources.
Recognising the above-mentioned failures is prerequisite to set new models for the global economic development (and perhaps one should add, for the survival of life on Earth). In this sense, an important and much needed contribution could come precisely from economics. As Dasgupta observes in the Preface of the Economics of Biodiversity, “nature entered macroeconomic models of growth and development in the 1970s, but in an inessential form. The thought was that human ingenuity could overcome Nature’s scarcity over time, and ultimately (formally, in the limit) allow humanity to be free of Nature’s constraints” (p. 3). Now the time has come to change all this and assign the correct value to Nature.
Among other things, sustainable economic development requires nations to take a different path, where the engagements with Nature not only would become truly sustainable, but would also enhance the collective wealth and well-being and that of future generations. The Review develops the economics of biodiversity on the understanding that we – and our economies – are ‘embedded’ within Nature. One should expect this change of perspective to have a significant impact on economic theory, economic research and related policy-making processes in the years to come.
Additional key messages contained in the Dasgupta Review
The Review is a complex yet extremely informative reading. It is expected to have a major impact on the global policy-making processes in the future. Some of the key messages contained in it can be summarised as follows:
biodiversity is declining faster than at any time in human history: the current type of engagement with Nature is globally endangering the prosperity of current and future generations;
our economies are embedded within Nature, not external to it: the impact of our interactions with Nature should be thus fully accounted for, and our demand should be significantly rebalanced with Nature’s capacity to supply them;
the process of choosing a truly sustainable path of development is related to transformative change, underpinned by levels of ambition, coordination and political will akin to, or even greater than, those of the Marshall Plan.
Q&A with Professor Sir Partha Dasgupta, March 2021
Q1 Professor Dasgupta, is there any risk that the Review may oversimplify the concept of ‘Nature’ by presenting a standardised or even ‘commodified’ image of it?
A1 I know of no society – contemporary, traditional or indigenous – that does not regard most ecosystems as ‘commodities’. People in all societies, by the very fact that we are embedded in nature, are obliged to make tradeoffs between what they take from their surroundings and what they let alone. Simple survival requires we do that, and to deny that is an affectation that only well-fed intellectuals can afford to luxuriate in. To be sure, societies leave aside some particular objects of nature as sacred (not to be touched), just as modern societies protect ecosystems by creating ‘public parks’ not just for amenity but also for protecting ‘endangered species’. I think critics confuse ‘commodification’ with ‘markets’. But the Review goes to great lengths to dispel the notion that markets are the right institutions for nature’s goods and services. So I don’t know where that particular complaint comes from!
Q2 You question the real usefulness of economic measures such as the GDP. How could policy-makers and global political leaders really get the message this time, and thereby start shaping policies accordingly?
A2 Governments in various countries are already making a move away from the practice of regarding GDP growth as the sole measure of economics progress, but only in varying degrees. Some, like New Zealand, China, and the UK, are moving relatively fast, whereas others are sluggish. The Review does not only criticise the use of GDP for assessing long run economic performance, it also constructs the right measure, namely inclusive wealth, and proves why the latter is the right measure. The Review sketches ways in which countries could move away from GDP and construct measures that reflect aspects of inclusive wealth. It recommends that governments ought to build a multiplicity of measures, but with discipline, that is, the measures ought to reflect various aspects of inclusive wealth – for example the UK’s ‘natural capital accounts’.
Q3 In Chapter 20 you focus on finances and investments, suggesting that an effort shall be made to direct investments towards sustainable projects, conservation, restoration, and in general in activities adopting a more sustainable engagement with the biosphere…
A3 The overarching idea is to bring actions motivated by private aspirations to align themselves with actions that promote the common good. Economic theory has long shown that under ideal circumstances that would be achieved by a system of perfect markets for all goods and services and a system of wealth transfers to correct for inequality. The Review shows why that ideal cannot ever be reached. It then tries to find ways to bring the real world nearer to the ideal. Today firms base their investment decisions on current prices, forecasts of future prices, and government regulations. Forecasts of what the future holds are based on forecasts on consumer behaviour and government regulations. Firms face increasing uncertainty about the future in part because the biosphere is under increasing pressure (e.g. there could be tipping points at the source of supply chains – e.g. the tropics) and partly because of uncertainty in consumer concerns about the biosphere, and hence firms’ shareholders’ views. Furthermore, reputation matters to firms. The Review suggests that one way to create a greater alignment between company incentives and the common good is for consumers to insist that firms disclose the character at each stage of their entire supply chains. Government insistance that they do so would make that happen, as it happens today over personal health (food products come with labels on nutrinent content). The Review recommends ‘disclosure’ as a substitute for ‘forward markets’. Firms that anticipate consumer insistance in the future and take the plunge to behave in a green manner and disclose that will enjoy an early reputation advantage over rivals.
Q4 Finally, the Dasgupta Review puts a lot of emphasis on education by arguing that every person and in particular “every child in every country is owed the teaching of natural history, to be introduced to the awe and wonder of the natural world, and to appreciate how it contributes to our lives” (p. 498). How far are we, in this respect, with the design of environmental education programmes which can indeed help children and young persons to become the responsible citizens of tomorrow?
A4 Not at all far. The UK will probably introduce an exam on nature studies at the GCSE level. The danger in making it an optional course is that to do so would place the subject in a ghetto. The Review instead recommends that nature studies should be compulsory at both the secondary and the tertiary stages.
References and further reading
Dasgupta P.S. and G.M. Heal (1979) Economic Theory and Exhaustible Resources. Cambridge: Cambridge University Press
Dasgupta P.S. (1982) The Control of Resources. Cambridge, MA: Harvard University Press
Dasgupta P.S. (1993) An Inquiry into Well-Being and Destitution. Oxford: Clarendon Press
Dasgupta P.S. (2004) Human Well-Being and the Natural Environment. Oxford: Oxford University Press
Dasgupta P.S. (2007) Economics: A Very Short Introduction. Oxford: Oxford University Press
Dasgupta P.S. (2019) Time and the Generations: Population Ethics for a Diminishing Planet. New York: Columbia University Press
Dasgupta, P.S. (2021) The Economics of Biodiversity: The Dasgupta Review. London: HM Treasury.
World Commission on Environment and Development (1987) Our Common Future (Brundtland Report). Oxford: Oxford University Press.
From: pp.7-10 of WEA Commentaries 11(1), April 2021
https://www.worldeconomicsassociation.org/files/2021/04/Issue11-1.pdf