A version of this blog appeared in Bylines Cymru on 18th February 2024
No, I’m not an economist, so if you are and/or are better informed please challenge this “wip draft”. As it stands, it seems to me we have an enormous “elephant in the room” re GDP, which we can no longer ignore!.
Unless we learn to count properly and ensure everyone pays a fair price for the goods and service we buy and/or use then we will destroy the ecosystems upon which our civilisation depends for survival.
Until recently I, as most still do, looked to official statistics like GDP, GDP per capita and associated discussions related to productivity, capital investment, etc, to guide my thinking and views on the state of the economy.
My recent insight should temper discussions related to economic development, the constitution and fiscal transfers, and most importantly the existential environmental and climate challenge we are facing.
Instinctively I knew something was wrong with the official figures that seem to influence nearly all aspect of our lives. I even wrote a blog[i] about it a few years ago. It was during that process I first and belatedly came across Kate Raworth and her book Doughnut Economics[ii]. That finally helped put my discomfort into a more substantive and evidence-based context.
GDP[iii], is a measure of the wealth of an economy and purports to represent the value of the activities of a nation, region etc. It is derived by totalling the value of all the commercial interactions in an economy, those millions of consumer and B2B transactions and the price of each, to create an aggregate figure. The numbers of people involved in generating a particular GDP provide some measure of productivity.
For a 100 years GDP has been at the heart of most economic thinking, state budgetary considerations and wider political discourse – and it is wrong. Every decision we make is corrupted by the misrepresentation of GDP – and especially in overlooking what it does not include.
Economists are very familiar with externalities. These are costs or benefits associated with an activity or transaction that are not directly monetised or accounted for in the price of that transaction.
For example, the external costs of car use. This includes road traffic accidents and costs to address, degraded air quality and the health impacts thereof, induced demand, etc. There are some positives like personal choice and convenience and wider economic benefits (although they are often captured in business cases to support road building) and agglomeration effects. The negative externalities are typically bigger and socialised. To be clear the freedoms, choices and conveniences of our modern world often have wider costs not borne by the individual enjoying those benefits.
Sometimes these externalities have an immediate impact (the loss of trees and animal habitats in the Amazon to raise beef, CO2 emissions from car use, etc) some take longer (eg low-density sprawl resulting from a car friendly planning system).
One thing is now also clear to me, the major externalities associated with nearly all our transactions, especially consumer, levy a cost to the environment: either through carbon emission or wider environmental degradation (especially loss of precious and unique ecosystems). This is now a burning issue!
While there were relatively few humans not engaged in modern economic activities, then those external costs (so cutting down trees for development, the loss of animals and their ecosystems etc) was a very small cost the planet could handle barely without noticing. In effect, planet earth was accumulating all these costs in a planet size bucket of immeasurable size of which we were really unaware. So, we behaved like it didn’t matter…and still do.
However, today, given 9 Billion people and our rapidly growing economies, we need to start to value our natural environment if we want to protect it[iv]. For example, what is the value of a bee, or a tree, or clean air with no more CO2 in it.
If there were suddenly no bees, no trees and all our air was as polluted as that coming from a car (tail pipe and tyre/break particulates) with even more CO2, then our planet would be in serious trouble (well it already is). Life as we know it would not be possible.
So, bees, trees and clean air and keeping CO2 levels at or below its current elevated level clearly have a value. The question is, is that value represented in our economic and commercial transactions and ultimately reflected in GDP. No – they are external, and costs we have been throwing unconsciously into that planet size bucket for hundreds of years. This is like some sort of planetary off balance sheet liability account. That bucket is now overflowing, and the planetary auditors have found a major accounting error in our calculation and treatment of GDP given the scale of the environmental liabilities built up.
Starkly those countries who have experienced the most GDP growth and have the biggest GDPs, have and are producing, the most external costs (for example, GDP is correlated strongly to CO2 emissions). Historically, people and countries with the highest GDP/capita have generated the most negative costs – and so have done the most damage to the planet (ref ONS[v]) See Figure 1. Most great entrepreneurial endeavours and those that have made their fortunes from such, have often done so because they never had to account for these externalities. If they had, perhaps some would still be wealthy and fairly remunerated for their efforts, but the scale of that gain would likely be much lower.
Figure 1 From ONS 2019 Analysis of CO2 Vs Economic Growth
We have a problem. Think about it, consumer products with built in obsolescence that need replacing every few years (we used to repair things once, now we plunder the planet for natural resources to make products that end up in landfill in a few years…iPhone what number?), pulling up trees in the amazon to raise cattle to make burgers for people (often overweight) in Europe, ripping out mangroves & destroying Orangutan habitats to grow palm oil, transporting New Zealand lamb to Wales in flying fridges, new bigger/heavier cars bought/replaced more often, intensive farming and the loss of hedgerows and habitats, and of course the continued production of CO2 which is pushing our current climate and ecosystem to the brink. And now we have perversity of the drive through coffee shop.
All these things are associated with financial transactions that do not account for their negative externalities and especially those that are directly linked with carbon emissions and environmental degradation. This is madness.
This can’t continue, the problem now of course is that the planet size bucket is full to overflowing and cannot take any more of those external costs. We have to deal with these liabilities.
I will let the economists comment on this, but it seems to me that the law of supply and demand and the consequent “efficient use of resources” to maximise profits has not but should be constrained by the environmental costs of using those resources. The problem is that for decades we did not really see those costs – but they are there, and we are now all paying the price.
We need to deal with this accounting omission and reassess how we quantify every transaction we make. That means we need to factor in these external costs so that consumers pay a price the reflects the intrinsic value of a tree, a bee, an orangutang and a planet that does not exceed 2oC of CO2 ( We are going to miss 1.5C), etc. If these external costs flowed into consumer and B2B prices, then we would all make different and more sustainable consumer choices.
More locally, that means Wales, with a lower GDP per capita is by default actually causing less environmental damage per capita than London and SE England where more disposable income is enabling many more consumer transactions with their associated externalities. Who is subsiding who? I have often said the question of self-determination and the economic viability thereof is going to be much easier to address in the context of a complete rethink in how we calculate GDP which is the much harder but perhaps more necessary task.
I am not saying we need to close down the economy, or to stop driving or flying, or buying stuff (although we do need to reduce) or hinder entrepreneurial endeavours. It’s just simply that we have to properly assess, quantify and apportion those negative externalities so that they are reflected in consumer prices. This will result in different consumer choices and a different shaped economy that ought to be more in balance with nature – which it has to be. As stated we have to recognise that the freedom and choices and convenience we enjoy, come at a cost we are not paying.
For me, in the short term, this can only come through fiscal and regulatory measures. People won’t like it, but we are going to have to tax and regulate to save the planet. The discount many of us have received, especially in the more developed economies, has to end. We need to acknowledge that unconstrained capitalism and consumerism has been subsidised and we now have to account for those previously ignored off balance sheet externalities and liabilities and start paying a real price.
In that context we also ought to acknowledge that the UK has one of the lowest tax/GDP ratios in Europe [vi] [vii], crumbling public services and a ballooning debt of £2.5Tn; rather than more traditional taxes, perhaps we can begin to develop these more essential fiscal disincentives targeted at our negative externalities.
This will radically re-shape out economies – but might save the planet; and the bees, trees and orangutans at the same time.
[i] M Barry 2021, The Environment, Tax and Wales – Mark Barry (swalesmetroprof.blog)
[ii] Kate Raworth, Cornerstone, 2018 “Doughnut Economics : Seven Ways to Think Like a 21st-Century Economist”, Kate Raworth | Doughnut Economics
[iii] International Monetary Fund, Gross Domestic Product: An Economy’s All (imf.org)
[iv] M Barry, 2023, The population conundrum…and immigration opportunity – Mark Barry (swalesmetroprof.blog)
[v] ONS, 2019, The decoupling of economic growth from carbon emissions: UK evidence – ONS
[vi] OBR 2021 https://obr.uk/box/the-uks-tax-burden-in-historical-and-international-context/
Mark Barry 