Economists vs. Ecosystem Commodification (Part III)

By Sterling Burnett -- July 13, 2013

“Due to a lack of knowledge and/or limited possibility of commodification due the impossibility of accurate pricing and the inability to enclose the commons for some environmental goods, it is an open question as to whether it is even possible to value ecosystem services as a whole – as opposed to a select few benefits that flow from particular sets of relations within an area.”

Many economists find valuing global (and most times even local) “ecosystem services” difficult. Nonmarket pricing, indeed, is inherently impossible to solve or thus requires very questionable methodologies.

Critics of environmental commodification argue that the ongoing public funds for such efforts are neither now, nor are they likely to be in the future, justified. Alleged market failure, in other words, is swamped by other failures in the “solution.”

The Knowledge Problem

The former point is really more of a concern of mine, than for other researchers who have written on the topic. Due to a lack of knowledge and/or limited possibility of commodification due the impossibility of accurate pricing and the inability to enclose the commons for some environmental goods, it is an open question as to whether it is even possible to value ecosystem services as a whole – as opposed to a select few benefits that flow from particular sets of relations within an area.

Concerning the knowledge problem, for instance, there may be some logically possible world where people know every species in existence, every niche or role it plays in the ecosystems within which it interacts, every geographic and climatological feature, and the host of other factors that go into creating valuable ecosystem services, but that is not the world we live in nor is it ever likely to be.

Below I will present arguments that “ecosystems” don’t really exist, but even if they do, we are woefully ignorant of their intricate workings. Most ecologists and many environmental economists describe ecosystems as if there were living organisms that maintain themselves in a relatively static state – a state of balance or equilibrium.

Value Flux

But nothing could be further from the truth. As noted biologist Daniel Botkin has pointed out, this is a myth. On both large and small scales ecosystems, habitats, atmospheric conditions species make up, etc. are constantly changing, impinging upon and being impinged upon by each of the other factors. They change over time and place.

Thus, trying to place a value on a particular ecological service is doing nothing more than taking a time-slice view of that service, its value and continued availability without ongoing human intervention.

A similar to a critique made by Allen K. Fitzsimmons, who argued that Ecosystems are mental constructs or:

heuristic devises, rather than real entities that Mother Nature placed on the landscape to await discovery by scientists who apply theory and/or agreed upon methodologies and protocols. Indeed, no such methods or protocols exist. Consequently, in nothing more than a geographic free-for-all, researchers are able to fix the location, shape, and size of the geographic unit they call an ecosystem using whatever variables and means suit the project at hand.

That is why, for example, federal agencies strongly disagree on how a map of the nation’s ecosystems should look. Such a laissez faire approach allows scientists to declare that an ecosystem is a dung pile, a whale carcass, a watershed, the entire planet, or any other bit of the Earth’s surface that is convenient for the moment.

Rather than ecosystems providing valuable services Fitzsimmons argues that the benefits or services provided to humans by nature are rather “the serendipitous byproducts of individual living organisms seeking to survive and nonliving things following fundamental laws of physics and chemistry.”

For instance, while pollination does benefit humans but ecosystems do not pollinate anything rather individual insects, birds, and other biota that move from flower to flower in normal pursuit food are responsible for pollination.

Synthetic Pricing = Mispricing

Moving on to my second claim, if one cannot even understand the make-up of an ecosystem and the processes that create the service we are to value, than it is hard to imagine an accurate price for the service since in fact, in many instances humans can take numerous interventions in a particular ecosystem and still receive the service. Finally, there may be a limited number of services for which, even if due to scarcity it became worthwhile to do so, it would be in practice arguably impossible to commodify – for instance oxygen in the atmosphere.

In general, most economists are dismissive of the efforts of environmental economists to calculate the value of ecosystem services. Why? Several reason, including: the use of questionable methodologies, perceived bias of environmental economists in choosing what data, results and studies to include or not include when calculating ecosystem values.

Some economists have critiqued environmental economists’ regular use of willingness to pay (WTP) surveys to calculate the social benefits of ecosystem services, since there a number of other ways to calculate such values that regularly produce wildly different estimates.

For instance, environmental economists could use willingness to accept (WTA) surveys to estimate the value of ecosystem services. Some might object that such a choice would imply at least the possibility of property rights in ecosystems or their constituent parts, but that it true for WTP surveys as well.

The standard assumption of economics is that when income effects are small, the gap between WTP and WTA should be negligible. In other words, the allocation of property rights should not influence the way externalities are internalized by the market. However, in practice, economists have generally found that values under a WTA regime greatly exceed those same values under calculations of WTP. It seems that people value a good or service more if they own it.

V. Kerry Smith vs. Costanza

In an article in Regulation, magazine, V. Kerry Smith an environmental economist with Resources for the Future, argued that there were a number of methodological flaws with Costanza’s study, three of which he noted. According to Smith:

Willingness to pay is defined for one or more specific changes in something that affects human well-being. It assumes that other factors influencing people’s decisions are unchanged. If we compute a willingness to pay for one set of ecosystems, others are held constant. Altering previously unchanged elements yields a different willingness to pay. But the whole is not necessarily the sum of its parts. Willingness to pay estimates are not necessarily additive.

The relationship between the two willingness- to-pay measures and the composite value of the change in the two ecosystems depends on how they are related and on income effects. For small changes, where the monetary commitments are modest, the income effects associated with doing each in isolation versus the two together may be modest, but for large changes they are not.

A second reason for Smith doubts Constanza et al. estimates is that the authors have defined a situation where society’s willingness to pay is expressed as payment to maintain the seventeen ecosystems in a take it or leave it fashion, implying an all or nothing choice for the seventeen ecosystems’ annual services.

This is clearly implausible. Choices about potential modifications of ecosystems are not all or nothing but rather, marginal. Except in the extreme, where a single change causes all life to collapse, when making decisions about land use or ocean exploitation, the choice is between the marginal value of the benefits from the change, weighed against the marginal costs of such a change. For any particular choice, some amount of an ecosystem service may increase or decrease, but it is unlikely that the whole system and or related systems will collapse.

Finally, Smith points out accurate WTP calculations depend upon the availability of substitutes, but Costanza et. al. assume that all areas within a particular ecosystem are perfect substitutes for one another, and that similar ecosystems (deserts, tropical forests, etc.)widely dispersed around the world are also, value wise, substitutable. Neither assumption is correct.

R. David Simpson Critique

Another problem identified by Smith, a critique expanded upon by R. David Simpson, in is United Nation’s Environment Programme paper, The “Ecosystem Service Framework”: A Critical Assessment, involves the standard use by environmental economists of stated preference studies rather than more commonly accepted revealed preference study. As Simpson points out,

 economists often distinguish their discipline from other social science approaches by noting that they base their analyses on what people actually do rather than on . . . (what) people say motivate their actions.

In stated preference studies, participants are asked how much they would pay for a particular good or service. By contrast, in revealed preference studies, economists look at how much people actually do spend on these goods and services. In short, critics have argued that respondents to stated preference surveys treat them as opportunities to buy good karma or moral satisfaction, without actually having to spend the money – there are no actual budget constraints when simply stating ones preference.

Simpson notes a host of other methodological or institutional problems with attempts to calculate the value of ecosystem services. Consider publication bias and researcher bias. In academia it is still largely publish or perish – a professor is unlikely to get tenure if his work isn’t regularly published in reputable peer reviewed journals.

The problem is that research has shown that such journals are far more likely to publish a study that finds statistically significant results. Since this is the case, applying apply economic theory to economists, it seems unlikely that a large numbers of economists would devote scarce time and other resource to write up results that they know are likely to be rejected when submitted for publication. As a result, they might prescreen research projects, moving forward with only those that yield significant results.

On the other hand, researchers might find and report strong positive results because they firmly believe that such results are correct. Simpson provides an example. Suppose that a researcher believes that the services performed by a particular forest ecosystem are of considerable value.

Yet after testing the hypothesis the results show the hypothesis to be wrong – the forest is much less valuable than the researcher thought, in fact it is equal to or less than the value of a proposed development.

The researcher can react to this information in one or a combination of two ways. First, he can say “That’s surprising! I must have been wrong,” and change his mind. Or, he can say “I’m pretty sure I’m right about the value of ecosystem services; thus my method or analysis must have been wrong. In which case, he starts again to get the “right” result.

Mind you both proponents of ecosystem service valuation and skeptics can run afoul of personal bias.

Another problem summarized in Simpson is what he refers to as benefit transfer. Costanza et. al. failed to note that even if a particular type of ecosystem in one location provided all the same services as the type does in another location, the value could vary greatly based simply on their proximity to human population centers.

Whereas human activities in one location could be stressing such an ecosystem causing a significant loss of function, the loss of similar function whether due to human activities or not, would not create the same loss of market value if no human populations rely on the ecosystem. If an ecosystem collapses and no one is around to notice, and it has no significant negative externalities, did it really matter?