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The BBVA Foundation honors Partha Dasgupta, a pioneer in environmental economics

The BBVA Foundation Frontiers of Knowledge Awards in Economics, Finance and Management has gone to Partha Dasgupta (University of Cambridge) for his work on the interaction between economic life and the natural environment. This research gave rise to environmental economics and “provided a framework for green accounting which is now widely adopted for measuring sustainable development,” the award committee noted.

La Fundación BBVA premia a Partha Dasgupta, pionero de la economía medioambiental

Dasgupta’s work, dating back to the 1970s, has built “a basis for analyzing how societies with a fixed quantity of depletable resources should allocate resources over time and invest in alternative technologies,” to facilitate their conservation, as acknowledged in the citation composed by the BBVA Foundation's awards committee.

Nobel Economics laureate Eric Maskin, chair of the selection committee, said, “More than any other economist of our time, Partha Dasgupta has stressed the important interplay between economic life and the natural environment. In all his work, he emphasizes that all economic activity has implications for our natural environment, often negative implications unfortunately (degradation of the environment), and that those implications must be taken account of in order to formulate and carry out economic policy that really makes sense, not just for the people in our world today, but for future generations.”

From resource economics to process economics

“Most economists who work on natural resources or the environment think about nature as providing certain types of goods, like food, clean water, timber, fibers, pharmaceuticals, or medicinal substances,” said Dasgupta in an interview minutes after hearing of the award.  “So these are goods. These are objects that you can harvest from nature and transform with our human ingenuity into a final product, like the clothes we are wearing or the painting in the room where you are sitting, and so forth. These are the things we make out of the goods that nature gives us.”

At the core of this conventional line of economic thought, he explains, is the idea that when a good becomes scarce, you can substitute it with another offering the same or similar results.  But Dasgupta came to realize that nature supplies something much more important and irreplaceable than goods. It supplies processes (or in more economic terms, services). Of course we care about nature’s goods, like water, food and clothing, and so on. But none of this would exist without the underlying processes of nature.”

Climate regulation is among the services, or processes, that Dasgupta uses to illustrate his point: sunlight comes and gets reflected into space, water evaporates and comes down as rain. “You have the water cycle and you get your drinking water from it. And what is not consumed doesn’t disappear, it just evaporates or becomes part of the ocean through the river system and so forth. But if you mess around too much with climate, you also mess around with the water cycle, which will end up weakened... If you deforest too much or get rid of biodiversity in the Amazon, you’re going to exacerbate climate change. So my work has been to bring these issues into economics.”

Dasgupta believes economics has become overreliant on the idea that scarcity can be overcome by substituting goods: “In industrial production, of course, this idea of substitutability has been a great success.”

But there are limits to this, when you tamper with processes:  “Just think of the human body. You have the metabolic process, which keeps you in a healthy state, and it would be foolish to think you could substitute one process for another. You wouldn’t say let me have less digestive capacity, but more running capacity.” The problem we now face is that some of nature’s processes are threatened by climate change and biodiversity losses being driven by human activity.

Partha Dasgupta (University of Cambridge). - BBVA Foundation

Acknowledging the value of nature in wealth measurement

The ideas Dasgupta has developed in over forty years of research has implications for pricing systems, economic and regulatory policies and, an aspect he believes merits special attention, the measurement of wealth and well-being.

He maintains that conventional indicators like GDP cannot give the real value of an economy; firstly, because they are flow measures, reflecting the goods or services produced in that economy over a set period of time “The trouble with flow is that it doesn’t tell you anything about what might happen tomorrow.”

His proposal, accordingly, is to measure wealth and well-being by reference to changes in the stock of capital over time across all goods and services: “In the same way that companies have balance sheets, as well as profit and loss accounts, we should have balance sheets that include natural capital, not just factories, educated people, machines and so forth, which are already there in the national statistics, but nature as well.”

The importance of measuring natural capital depreciation

The second reason he gives for rejecting GDP as a valid measure is that it does not reflect capital depreciation (the gross in gross domestic product means depreciation is not subtracted). The result is that the case could arise (and is likely happening right now) where a country reporting high rates of GDP growth is actually eating into nature.

“And that’s very dangerous because you can suddenly find yourself in difficulty, as we are now with climate change. Climate change is a problem, but GDP doesn’t reflect it, because carbon concentration is not part of its calculation. So when measuring wealth, you have to include nature as part of that wealth, that is, the ecosystems you are using for your purposes. Sustainable development should ideally mean that this inclusive notion of wealth increases over time, and does not decline. That’s sustainable development.”

Dasgupta points out that countries like the United Kingdom are looking at ways to draw up this kind of wealth account. And the United Nations Statistical Office has been trying for some time to estimate stocks, as has China.

The Dasgupta Review on “the economics of biodiversity”

It is not only in research that Dasgupta has left his mark, as noted by Lucrecia Reichlin, Professor of Economics at the London Business School and a member of the award committee. “As well as a theorist who laid the foundations of environmental economics, he is also an advocate for the natural world. And these two facets came together in his leadership of the Dasgupta Review, where he brought both his theory work and work on measurement to bear on the issue of biodiversity. The review was commissioned by the UK Treasury and, since it came out in 2021, has had a big impact on the discussion of how we should think about growth in relation to the environment.”

Dasgupta refers to the review when asked what measures we can take to put his theoretical insights into practice, for it offers abundant examples from the micro level, in the hands of local or national authorities, up to initiatives on the global stage. In this last sphere, he proposes the setup of a new supranational institution.

The problem, he concludes from his conversations with leading political figures, is that the world is not ready for an international organization to take on this role.

“To which my answer used to be, and still is, that at the end of the Second World War, Europe was completely on its knees, the Far East too, and the world economy was shattered. But within three years we created the United Nations, the World Bank and the IMF. All these international organizations were created in a period of between five and ten years. Why did we do that? Because we needed these public goods. We needed peace, which is a public good. We needed development, which is a public good. The financial stability provided by the World Bank: that is a public good. Now here is a situation where we are running into difficulties with another public good, nature. The problem is not the logic of the proposal, it’s the politics or the feasibility perhaps,” he concluded.