February 9, 2010

Economics Guru Explores the Future Of Natural Resources in Business

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Despite his status as a leading international economist and, Sir Partha Dasgupta presented himself as a strikingly down-to-earth speaker with his sleeves rolled up and his necktie slackened as he lectured to a packed auditorium. If some attendees were confused by the choice of the Plant Science Building as the venue for the economics discussion on Feb. 4, they certainly left the auditorium with a better understanding of how the two disciplines overlapped after A. D. White Professor-At-Large Dasgupta’s talk on natural capital and intergenerational well-being.

“Economics, when used with care, is meant to serve our ethical values,” Dasgupta, who is currently a Frank Ramsey Professor of Economics at University of Cambridge wrote in his book Human Well-Being and the Natural Environment. Later in the book, he writes, “Life is precious and is the reason why the natural environment is valuable.” Dasgupta asserted during his lecture that economics can be a way to improve human well-being across generations.

One of the focal points of the talk was natural capital, a factor of production in economics that includes the environment and natural resources. From Dasgupta’s perspective, several of his contemporaries and predecessors have treated the topic as too much of an afterthought. The famous classical economist David Ricardo, for example, incorporated natural capital into his theories as land, treating it as a type of indestructible fixed capital. But there’s a simple problem with this assumption, claimed Dasgupta. “It’s wrong,” he said, “for the reason that nature is very much destructible.” A better economic model will take into account the various ways that nature can be changed and what effects these changes could have.

In an effort to “introduce nature into economic reasoning,” Dasgupta has urged other economists to go beyond traditional thinking and consider the environment’s role in broader terms. An example he cited was deforestation. Standard economic models can look at the immediate impact, but they don’t take into account the effects of deforestation on people separated by distance (perhaps in a village downstream) or separated temporally (across generations).

Dasgupta was the first to admit, though, that what he has been proposing won’t be easy to implement. The most immediate problem is that many of the things that fall under the category of natural capital are able to move. Flowing water is an obvious example of this, but even earthworms can be counted as natural capital due to their effect on the soil. Because of this, it can be difficult to create enforceable property rights for natural capital. Nevertheless, Dasgupta remains optimistic that progress can be made and maintains that there have been several success stories, both local and large-scale.

Although Dasgupta is certainly one of the most notable figures in economics to take into account the role of the environment, he’s far from alone.

“For over a hundred years, there have been some few economists who have attempted to integrate natural, physical, and biological phenomena with economics,” said Richard Schuler, Prof. Emeritus, economics and civil and environmental engineering. Schuler first came across Dasgupta’s work in 1974.

In his experience as a professor, Schuler has witnessed “remarkable synergies between biologists, ecologists, and economists.” One of the main goals of his own work is to find ways to reconnect people with their natural environments.

Ultimately, Schuler summed up Dasgupta’s message as one of realizing the interdependency of different networks in life: “We have a variety of complex networks that support modern human societies. [Dasgupta] touched on the complexity of those economic networks and also emphasized how they have to sustain and support the biological networks and ecologies that underpin all human existence.”

Original Author: Tim Gahr