How have economists thought about the environment?

The economics profession have often been accused of coveting economic growth at the expense of the planet. But this caricature is misleading: there has been steady engagement with the environmental consequences of economic activity in the work of economists, both historic and modern.

‘Human-induced climate change is already affecting many weather and climate extremes in every region across the globe.’ This statement comes from the sixth Intergovernmental Panel on Climate Change (IPCC) assessment report, published in August 2021, which has called for urgent action to prevent worsening climate outcomes in coming years.

The report landed after the summer of 2021 had seen extreme weather events affect all corners of the globe. Extreme temperatures have plagued the world from northern Africa to southern Russia, the German town of Erfstadt was hit with unprecedented floods, extreme temperatures scorched Lytton in British Columbia, and streets were turned into canals in the Chinese city of Zhengzhhou, to name but a few.

The causes and effects of these extremes are being hotly debated (pun intended) in mainstream media outlets, including a cover of The Economist with the gloomy forecast, ‘No Safe Place: The 3° Future ’. Following the UK’s hosting of the United Nations climate summit (COP26) in Glasgow in November 2021, the issue of how we protect our environment has never been so pressing.

There is a mistaken impression that economists do not engage with the subject of climate change and the environment more broadly. For example, it is likely that attendees at COP26 – and most people with an eye to sustainability – will have heard the phrase (widely attributed to Kenneth Boulding, a former president of the American Economic Association, 1968), ‘Anyone who believes in indefinite growth in anything physical, on a physically finite planet is either mad – or an economist’. This quip is based on a caricature of economists as being only interested in economic growth.

Not only is the taunt widely quoted, it has been used by influential members of the global intelligentsia, including as a punchline by David Attenborough in his 2011 RSA president’s lecture and by the environmental scientist Vaclav Smil in a 2019 op-ed in the Financial Times. The sentiment is echoed by high profile environmentalists such as Greta Thunberg who remarked, ‘we are in the beginning of mass extinction, and all you can talk about is money and fairy tales of eternal economic growth’, at a speech to the United Nations in 2019. The view that economic growth is at odds with environmental issues is even familiar to the person on the street (as evident in a recent letter to the Irish Times). But this view appears to conflate the functioning of economic systems with economic thought.

Kenneth Boulding wrote one of the most influential essays on environmental policy, which presented a template for a sustainable society. He made the distinction between an open or ‘cowboy’ economy, which assumes an infinite supply of resources, and a closed or ‘spaceship economy’, with finite supplies of resources and solar power being the ultimate source of energy once all fossil fuels are consumed.

As Boulding was writing, there were concerns about resource scarcity and the issue came to the fore in the publication of Limits to Growth in 1972, which warned of a sudden and uncontrollable decline in economic growth on the planet within the next 100 years due to resource scarcity. But Boulding was more prescient, noting that ‘it seems to be in pollution rather than in exhaustion that the problem is first becoming salient’.

But is it accurate to say that economists are largely unconcerned with the environment and focus only on growth? This article presents an overview of economists’ views on the environment over time to illustrate how economic thinking has engaged with these issues, how it has evolved and how it has shaped our understanding of the challenges of pollution, natural resource management and the value of nature today.

Environmentalism and economics

Environmentalism first came to the fore with greater awareness of the pollution associated with economic activity. The great London smog of 1952 – caused by a combination of severe cold, anticyclone conditions and residential coal burning – killed an estimated 8,000 Londoners (Stone, 2002). Smog is a similar problem that plagues China today (Wang et al, 2016) with 1.24 million deaths in 2017 attributed to air pollution (Yin et al, 2020).

Elsewhere, industrial activity was linked with other adverse environmental and health effects. A new disease of epidemic proportions was discovered in Minamata Bay in Japan in 1956. Minamata disease, as it became known, was caused by mercury poisoning resulting from effluent from a new industrial plant (Takeuchi et al, 1962). News that the pesticide DDT was entering the wider food chain also caused public outrage when highlighted in Rachel Carson’s 1962 book Silent Spring (Sabin, 2013; Macekura, 2015).

Events such as these, combined with photographs of the planet from space, made the idea of planetary boundaries on economic activity tangible (Pearce, 2002). The late 1960s and 1970s saw the emergence of environmental awareness as several provocative works caught people’s attention, such as Paul Ehrlich’s Population Bomb published in 1968: at the time it was written, global population had approximately doubled in the first 60 years of the 20^th century (see Figure 1). There were also critiques of the prevailing economic system from mainstream economists (Mishan, 1967; Georgescu-Roegen, 1971; Schumacher, 1973).

Figure 1: Global population and population growth, 1900-2020.

Source: 1900-60 original Maddison database; 1960-2020 World Development Indicators database.

Note: 1900-50 are census interpolations; the dip in the early 1960s coincides with Great Leap Forward famine in China.

One of the major intellectual influences of the time was the Club of Rome’s Limits to Growth, published in 1972 (Meadows et al, 1972). The report was provocative in its central message of ‘overshoot and collapse’ of the global economy. The non-technical summary of a computer model of the global economy by researchers at MIT focused on exponential growth in population, industrialisation, pollution, food production and resource depletion.

It warned of a collapse of the global economic system within 100 years (see Figure 2). A central focus was on depletion of non-renewable resources (such as aluminium, chromium, coal, cobalt, iron, lead, manganese and mercury), which would precipitate this global collapse. In one scenario, available global resources were assumed to double but even this did not prevent a collapse (see Figure 3). The report was so widely read that a contemporary cover of Newsweek ran with the headline ‘Running out of everything’ next to a picture of Uncle Sam looking into an empty cornucopia (Sabin, 2013).

Figure 2: World model standard run

Source: Meadows et al (1972)

Figure 3: World model with natural resource reserves doubled

Source: Meadows et al (1972)

The report coincided with the oil crisis of October 1973 to March 1974, which saw oil prices quadruple (see Figure 4). This seemed to support the gloomy prediction that humanity was running out of resources. Both Limits to Growth and the oil crisis led to a series of studies by economists that explicitly incorporated natural resource use into their evaluations.

Figure 4: Index of crude oil prices in 2000 dollars (1990-2000 = 100)

Source: BP Statistical Review of World Energy 2021

In fact, countering Limits to Growth was evidently on the minds of contemporary economists such as Nobel laureate Robert Solow, who, in his 1974 address to the American Economic Association, acknowledged that he, ‘like everyone else, [had] been suckered into reading the Limits to Growth’. This led to a series of studies that incorporated exhaustible (non-renewable) resources more explicitly in models of economic growth (see the symposium on the Economics of Exhaustible Resources published in 1974).

It also led to the foundations of the economic approach to sustainable development, achieving intergenerational equity via the reinvestment of rents from exhaustible resources into reproducible capital (such as buildings, machine and tools). For example, if $1 of oil is extracted from the ground, $1 is reinvested elsewhere (Solow, 1974; Hartwick, 1977).

Environmental economics emerged as a distinct field of study in its own right in the 1970s; the main journal in the field was launched in 1974 (the Journal of Environmental Economics and Management); and the first undergraduate textbook on environmental economics, written by David Pearce, was published two years later.

Environmental economics explicitly sees the economy as operating within the confines of the environment, and it explores issues relating to interactions between the economy and the environment, such as pollution control, natural resource management and the ‘amenity value’ of nature – characteristics such as pleasantness or aesthetics that influence and enhance people’s appreciation of an area (Hanley et al, 2019).

It focuses on a broad array of environmental issues, including design of environmental policy, valuation of non-market goods and services (for example, ecosystem services), and benefit-cost analyses that take account of the value of nature.

The treatment of the environment in economic thinking

Although many trace the formal origins of environmental economics as a sub-field to the 1960s, this built on intellectual foundations over the preceding 200 years (Pearce, 2002; Sandmo, 2015). Some of the core principles of environmental economics – resource scarcity and pollution – can be found in earlier writing.

For early economists in Britain writing in the late 18^th and early 19^th century (such as Malthus, Ricardo and Mill), resource scarcity was seen as a constraint on economic growth and wellbeing. Land was seen as the major constraint since population growth was checked by diminishing returns to agriculture. In effect, this implied that there would be decrease in incremental output as an increasing population (using similar agricultural practices as previously) worked a fixed amount of land, thereby leading to decline food availability per person.

Effectively, there was seen to be a race between technology (in the agricultural setting implying new seeds, farming tools, etc.) and population. This foreshadowed the future debates on resource scarcity (resources available per person) from Limits to Growth. While the earlier pessimism of Malthus and others need not be founded, the issue today is distinguished by a race between technology and climate (for example, see the work of Simon, 1981, and Kremer, 1993).

Mill also noted the importance of the public good nature of environmental goods as well as the aesthetic value of nature, stating ‘Nor is there much satisfaction in contemplating the world with nothing left to the spontaneous activity of nature’. In addition, he offered some early support for the concept of ‘zero growth’, a point where enough wealth has been accumulated that it can support the population comfortably: ‘I sincerely hope, for the sake of posterity, that they will be content to be stationary, long before necessity compel them to it’ (Mill, 1848).

Another notable contribution comes from Stanley Jevons’ (1865) Coal Question, which focused on the ‘exhaustion of coal’ (a case of absolute scarcity) and the implications this had for long-run British economic growth given the contemporary importance of coal. Jevons made the distinction between physical depletion (absolute quantity of the reserves available) and economic availability (coal that was extractable at relatively low cost). Economic availability was more of a concern than physical availability as it would lead to increasing prices across the economy (Missemer, 2012).

The work was so influential that Jevons received a letter from the William Gladstone, then Chancellor of the Exchequer, stating ‘it makes a deep impression upon me, and strengthens the convictions I have long entertained, but with an ever growing force, as to our duty with regard to the National Debt’ (Missemer, 2012). Jevons’ work encouraged a state inquiry – the Royal Commission on the coal question, appointed in 1866 and published in 1872 – into the coal resources of the UK. The findings of the commission showed that coal reserves were even greater than Jevons himself had estimated (Hanley et al, 2019; McLaughlin et al, 2014).

A similar theme was addressed by Harold Hotelling (1931) in his study of the economics of exhaustible resources. In the opening paragraph, Hotelling echoes the sentiments of Limits to Growth: ‘Contemplation of the world’s disappearing supplies of minerals, forests, and other exhaustible assets has led to demands for regulation of their exploitation. The feeling that these products are now too cheap for the good of future generations, that they are being selfishly exploited at too rapid a rate, and that in consequence of their excessive cheapness they are being produced and consumed wastefully has given rise to the conservation movement.’

Speaking to the issue of economic scarcity, Hotelling sought to answer what was the optimum rate of extraction in the present and the future given the finite availability of resources. He made the point that price (rather the difference between the price of the commodity and the cost of extraction) of a non-renewable resource would have to rise at the same rate as the rate of interest over time. This became an important contribution, especially in the world of resource scarcity (Arrow and Lehmann, 2005). Expansions of Hotelling’s approach led to the formation of a branch of economics focused on non-renewable resources (da Cunha and Missemer, 2020).

The work of Arthur Pigou (1920) on externalities – the idea that an economic activity could have a positive or negative impact on a third party – is traditionally seen as foundational in environmental economics. This is particularly with regard to proposals to address externalities. Taxes are seen as a way to reduce negative externalities by putting a price on the activity that has an impact on third parties (for example, a tax on a pollution-generating activity).

Likewise, subsidies would encourage activities that have positive externalities (for example, subsidies to beekeepers). But here Pigou was drawing on the formal conceptualisation of the ideas of externalities developed by Alfred Marshall (1890), his predecessor at Cambridge, who explicitly linked externalities from fisheries with market failure. Where the issue is that there are no property rights to open access ocean fisheries and that an individual firm could achieve constant returns to scale (two boats could catch twice as much fish as one boat). But if many firms increase their fleet of boats, the stock of fish declines, meaning they have to travel further to catch as many fish as before (Sandmo, 2015).

There are earlier examples too. Writing in the 18^th century, Condorcet used external effects of agriculture as an argument for government intervention when the exercise of private property rights by one individual violated those of another (Sandmo, 2015).

Industrial pollution became a hallmark of economic activity from the Industrial Revolution. Popular iconography of early industrial landscapes tends to show smoke billowing from chimneys in urban factories. There were also other malignant pollutants, such as toxic pollutants from alkali manufacturing.

While there were no conceptual economic models of what was happening to the victims of pollution, an early solution was for private landowners to exercise their property rights and litigate for compensation for property damage, more easily done if it was possible to identify the polluter (Dingle, 1982).

There has been greater engagement with the problem of pollution from economists in the 20^th century, especially in terms of discussing ways of controlling pollution from industrial activity; where pollution is typically seen as an external effect, a by-product of goods produced. Pigou himself used the example of pollution from factory smoke as an example of an external effect. Since the 1960s, the focus of economists has been on ways to reduce pollution at the least cost to society, especially through the use of market-based instruments such as taxes or permits (Baumol and Oates, 1971).

Pigovian taxes are still one of the fundamental approaches advocated by economists to address external effects. While they are commonly referred to as Pigovian taxes, this has distorted the origins as much of the initial work on pollution pricing was not particularly associated with Pigou (Banzhaf, 2020).

Another approach draws on the work of Gordon (1954) and Hardin (1968), and emphasises common property as a driver of many environmental problems. As there are no private property rights, individuals pursue their private interests without taking wider social interests into consideration (Stavins, 2011). One solution here, drawing on Coase (1960), argues for the allocation of property rights as an alternative solution to externalities, paving the way for market-based environmental regulation.

Another approach, drawing on the work of Nobel laureate Elinor Ostrom (1964, 1972, 1990), argues that individuals prioritising personal gain and neglecting the wellbeing of society – known as the tragedy of the commons – is not inevitable and highlights how it can be avoided through collective action, as people work together to provide a common objective.

While pollution occurs in rich and poor countries and in capitalist and socialist systems alike, there is a tendency to blame pollution on capitalism and associate it with economic growth (Ruff, 1970). A strand of economic research emerged in the 1990s that looked at the relationship between economic growth and pollution. These studies found an ‘inverse U’-shaped relationship between income and pollution, known as ‘environmental Kuznets curve’ (Grossman and Krueger, 1991).

The point made was that pollution declined after a threshold (as countries developed) and that the declines were driven by changes in the composition of the economy, improvements in pollution-abating technology and changes in social preferences (Dinda, 2004). These empirical findings spurred theoretical studies of the relationship (John and Pecchenino, 1994).

Coincidently, 100 years before these modern studies, British climatologist Frederick Brodie found a similar inverse U-shaped relationship for foggy days (a consequence of coal smoke) in London in the period 1871-1903 (Clay and Troesken, 2011). Brodie argued that in the initial years, coal was burned extensively but over time technological and regulatory changes induced decreases in coal burning.

In the past three decades, there has been greater interest in the idea of ‘natural capital’ (Brandon et al, 2021). This is defined as ‘environmental assets that are natural occurring living and non-living components of the Earth, together constituting the biophysical environment, which may provide benefits to humans’ (UN, 2014).

Incorporating natural capital into the total wealth of a country, which also includes reproducible (machinery, tools and buildings) and human (education, skills and knowledge) capital (Barbier, 2019), is foundational to how international organisations have viewed economic sustainability (World Bank, 2018, 2021; UN, 2018). If the total wealth per capita is constant or non-declining, this implies weak sustainability (Hanley et al, 2015).

But this approach of viewing capital as broadly as possible was the norm historically, with the total wealth of a country being seen as comprising people, commodities and land (Fisher, 1906; Dupuy, 2014; Fenichel et al, 2018)). Over time, however, land was swallowed by capital (Gaffney, 2008), something that in part appears to have been a reactionary response by American economists, such as Clark (1899), to the radicalism of Henry George (1879) who had called for a universal tax on land rents (Dwyer 1982). It is only in recent times that the significance of natural capital is being (re)discovered.

Conclusion

In 1969, U Thant, the United Nations Secretary General, made an emphatic speech at the Conference of the Eighteen-Nation Committee on Disarmament, stating that, ‘members of the United Nations have perhaps ten years left in which to subordinate their ancient quarrels and launch a global partnership to curb the arms race, to improve the human environment, to defuse the population explosion, and to supply the required momentum to development efforts. If such a global partnership is not forged within the next decade, then I very much fear that the problems I have mentioned will have reached such staggering proportions that they will be beyond our capacity to control.’

With the luxury of hindsight, the world has been on the brink of environmental crisis for the past 60 years and there have been countless examples of the boy who cried wolf, such as Ehrlich’s warnings of famines in the 1970s. The danger of perpetually warning of crises is that people become desensitised when they do not materialise. In many respects, the early doomsday predictions of environmentalists did not materialise (from Ehrlich’s warnings of famines and population collapse to his ill-judged bet with Julian Simon over the future prices of several non-renewable commodities) and led to complacency.

Economists have often been accused of coveting economic growth at the expense of the environment. This caricature is misleading. As highlighted, there has been a steady engagement with environmental consequences of economic activity in the work of economists, both historic and modern.

Environmental problems, such as climate change (see Figure 5, which highlights trends in growth in population and carbon emissions over the past 55 years), are complex in nature and require insights from across the sciences and social sciences to address them adequately.