One insight into the relationship between economic growth and environmental decay may be seen in the following example.
Let us assume that a shipwrecked Robinson Crusoe arrives on a desert island. He is without implements and quickly begins to worry about such things as food. Fish abound, but they can only be caught by hand. Mr. Crusoe find that he can catch 2 fish per day by hand-but he really would like to have more.
He tries to push thoughts of food out of his mind by relaxing and enjoying his very beautiful island. He particularly likes the scenic hanging vines and the stands of young trees.
Mr. Crusoe is then struck with an idea. Why not build a net so that more fish can be caught? “I wonder how long it will take? Is it worth the physical expenditure of effort? How many more fish will I catch?” He will naturally only build if it seems worthwhile. Mr. Crusoe is an economic man- he doesn’t engage in wasteful activity!
Mr. Crusoe estimates that it will take him one day to build the net. For that one day, he will catch no fish- he will forego consuming 2 fish. Thus he must restrict consumption in order to make an investment in the net.
Restrictions on consumption equal savings, and savings are used for investment. So it is with Mr. Crusoe, and so it is in our larger society as well.
Now, how to decide whether it is worthwhile building the net? In our society businesses try to relate what they get to what they give up. What they give up is an alternative use of their savings, and what they get is a return on their investment.
Mr. Crusoe can use his savings in many ways. He can build a net, or he can explore the rest of the island, or he can rest, or he can build a non-productive investment like a monument.
Mr. Crusoe makes a decision based on the range of alternatives that are available. Two fish per day is certain without the net; three fish might be caught with the net. Three fish would amount to a 50 per cent daily increase in fish: Not bad!
Mr. Crusoe is engaged in a decision process, the outcome of which will determine whether and to what extent economic growth takes place on the island.
Mr. Crusoe finally decides to make the capital investment. He then begins to look for raw materials. After all, a net must be constructed of something. Since no one owns the beautiful hanging vines and young trees, he cuts them all down to construct his net.
Mr. Crusoe is interested in keeping his costs low. By using the free vines and the young trees, his costs are only the two fish that he foregoes in the construction of the net.
A free good is one which has no market price; in economic theory, the unlimited use of a free good by any one party does not create scarcity nor does it deny use of that good to anyone else. Air and water are usually cited as examples of free goods.
Mr. Crusoe is a successful entrepreneur. His net works. He is catching and eating three fish per day. Daily gross national product or GNP (measured in fish) has increased by 50 per cent.
But- you guessed it – Mr. Crusoe is not happy. In fact Mr. Crusoe is not happy at all! Why? Let Mr. Crusoe answer: “I thought those beautiful vines and those slender young trees were free goods; they belonged to nobody. I thought the costs were all external. But I didn’t realize that when I cut them down, I would be depriving myself of the this intangible source of pleasure. Since I am the only one on the island and will be here for some time then it is clear that I did not correctly evaluate my true costs of production.”
Poor Mr. Crusoe. His true production costs were his foregone consumption (that is, the two fish) plus the loss in future aesthetic pleasure that he would have derived from the trees and vines.
Mr. Crusoe came from a society where his reasoning would have been perfectly acceptable. Free goods do not belong to anybody. One can dump waste into water, cloud the sky with smoke, cut down trees and make arid vast expanses of land.
Where Mr. Crusoe came from, costs of production only refer to private costs. Smoke damage, water damage and environmental damage may all take place in the production process; however, these actions do not show up as costs to the business. While they are certainly costs to someone, they are generally dismissed as “social costs” or “external costs.”
The critical lesson for Mr. Crusoe is the critical lesson for mankind. It is increasingly the case that what we do affects someone else. And what someone else does will affect us. Mr. Crusoe learned his economics in a society where free goods were there for the taking. Only society loses when the free goods are ruined.
When Mr. Crusoe becomes the surrogate for society, it becomes clear that a method of capital accumulation which does not take into account all costs will lead to environmental disruption. Similarly economic growth as it is conventionally measured must involve a continuing externalization of costs over time.
Businesses are not evil in their actions. It is simply that traditional accounting methods have a private orientation and only measure certain particular aspects of business behaviour.
The process outlined in the case of Mr. Crusoe is evident throughout our entire economy. In most cases pollution is caused by the externalization of costs. Industrial production leads costs which are not borne by the producing unit but by society at large. These costs are associated with waste in the water, smoke in the atmosphere, and noise in surrounding community.
The price of the product reflects only part of the costs of production. The private costs are absorbed by the producer while the social costs are absorbed by society. It is these latter costs which cause the deterioration of the environment.