Kenneth Arrow discusses human impact on our planet

Nobel Laureate Kenneth Arrow has been heralded as one of the most prominent economic theorists of the 20th century. Here’s Arrow on how to measure the impact of the anthropogenic causes of Earth change.

Many of these impacts are very indirect.

Kenneth Arrow: We’re using up fossil fuels. We’re putting carbon dioxide into the atmosphere. On the other hand, we are making technological progress. We’re inventing methods of cleaning up things as well as methods of destroying them. These are very disparate activities, so one problem is how do you measure the balance between these activities in some overall way? How do you measure the overall impact of these things?

Let’s take wilderness as an example. Economists say, yes, we understand the value of preserving species, preserving the natural habitat. But on the other hand, who benefits? What about the people who are kept out of that area? What about the wood? Where is the balance here?

Another example is ecotourism. On the one hand, ecotourism is a means of giving an economic stake in preserving a wilderness or wild game area. And on the other hand, it does create problems of its own.

So, this is the sort of thing that economists think about, of striking a balance between these kind of things. We think about what tactics might be used to best reconcile these.

One issue that’s going to be important in this century is what they call the ‘property rights issue.’ For example, a lot of the exfoliation of the planet takes place, with no economic obstacle, no price. Think of the forests. The forests are things that are hard to make private property. And the result is, in every country, they are utilized. Either they’re burned and become farms, or they’re logged for timber.

Ordinarily, the market works by one person wanting something which is going to impose a cost on other people. If I say I want workers, I have to pay workers for their toil. So, the idea is that the market balances benefits and costs. But, for example, mining is allowed in the national forests of the United States, and there are no costs to it. You’re allowed to mine there, regardless of the effect on the forest. There’s virtually no charge for the use of this valuable land

Water is another example. The rules on water are the most complicated things imaginable. A typical rule for water in California, for example, is use it or lose it. Take a stream running down through many people’s properties. Say you’re the first one to use it, and establish a historical claim. You haven’t paid for that claim. Nothing deters you from using as much water as you want. Once you start using the water, you have it. But if you stop using it, you lose it. Suppose farming is no longer as profitable as it once was, and I want to get out longer as profitable as it once was, and I want to get out. I know that I’ll lose all my water rights if I get out, and I’ll get no compensation for losing them. So, there’s incentive to keep on using the water even though it’s just marginally beneficial. So, you’re wasting water.

Both of these examples relate to what economists call property rights. In indigenous societies, frequently there are property rights in the form of some kind of cooperation. It’s like the cooperation people in our society have for fishing. It’s very typical all over the world for fisherman to limit their catch, because they know that if they catch too much there won’t be any next year. Or the nets have big meshes so that the young will escape. It has been very well documented that, for fishing, people tend to create a market, not like we ordinarily have, but a market that understands what costs that you’re imposing. It’s the idea that, at least for the resources you use, you should at least pay the cost to society. What you do today may not be so serious today, but it affects tomorrow.

Of course, the typical situation is using up fossil resources, for example oil and coal. Or the degradation of farmland. Those things are profitable today, but don’t take the future into account.

Or consider dumping carbon dioxide into the atmosphere, which for many years, didn’t create any significant problems. Now the dumping, which has been going on since the 1800s, since the Industrial Revolution began, is beginning to show up. The point being, once stuff goes in, you can’t take it out. So, the result is that there is a permanent effect, and – from the perspective of an economist – you don’t pay for it. You don’t pay a tax, a price for putting carbon dioxide into the atmosphere. This is what you call a dynamic effect, an effect over time.

Or think about what they call ‘ecosystem services.’ If you have a forest, not only do you have wood, but the forest also tends to control the flow of water. When you start deforesting, you start to get erosion, you start to get floods, because the forest acts like a big sponge. These things are very indirect.