Natural capital and the problematic measurement of GDP

I've been thinking a bit about GDP this year, and in particular about the weirdness of its measurement. One of the key problems that has occupied me has been an asymmetry in how capital is accounted for within GDP. When new capital is created, the spending on the new capital adds to GDP. However, when capital is depleted, that depletion does not subtract from GDP. That is why, following a large natural disaster, GDP might actually increase due to rebuilding activity (and because any destruction of capital is ignored).

With that in mind, I was interested to run across this 2019 article by Colin Mayer (Oxford University), Published in the journal Oxford Review of Economic Policy (ungated earlier version here), deep down in my to-be-read pile of articles. Mayer was a member of the UK's Natural Capital Committee, which ran from 2012 to 2020, and this article considers how economists can, and should, approach accounting for natural capital. Mayer distinguishes between economists' traditional view of natural capital, and an approach more similar to how an accountant would approach natural capital:

To the economist, natural capital, like any other asset, is the plaything of humans, there to be treated as mankind sees fit. To the accountant, the firm is an entity of which the managers are the stewards. They are there to preserve the firm and to promote its flourishing. So, too, we should consider whether it is our right to employ nature in the way in which we see fit, or our obligation to act as its steward or trustee.

Mayer's solution is that we should revise how natural capital is treated, and should:

...incorporate a maintenance charge in the balance sheets and profit and loss statements of nations, municipalities, corporations, and landowners to reflect the liability associated with maintaining or restoring these assets.

I think that Mayer could have been much clearer in the explanation here. When natural capital is depleted, through pollution, or extractive industries, or carbon emissions, my view is that the cost of that depletion should directly reduce GDP (which is the equivalent of the 'profit and loss statements' that Mayer refers to). Instead, Mayer seems to be suggesting that this is a liability. Both of those approaches may be correct, given the simple accounting identity (Assets + Expenses = Liabilities + Proprietorship + Revenues). A liability on the right-hand side of that identity equation can arise because of an expense on the left-hand side. However, the labelling as a liability implies an obligation to repay, which may not be the case for all types of natural capital (how would one pay off the liability of mining extraction, for instance?).

Anyway, there is clearly more thinking to be done here. I don't think that economists' approach to natural capital is correct. I think that the approach to other forms of capital (physical, social, and human capital) is similarly flawed. For example, decreasing social capital over time (as accounted by Robert Putnam's 2000 book Bowling Alone (which I reviewed here) should also decrease GDP in my view. By correctly accounting for changes in capital (both upwards and downwards) GDP would better capture changes in societal-level wellbeing.

This week in research #49

Another quiet blogging week for me, due to travel and the North American Regional Science conference in New Orleans (more on that in next week's post). However, I have been trying to keep up with research, and here's what caught my eye over the past week:

• Mello (open access) finds that winning the FIFA World Cup increases a country's year-over-year GDP growth by at least 0.48 percentage points in the two subsequent quarters
• Boyd et al. (open access) describe how an agent-based model could be used to evaluate the impact of minimum unit pricing of alcohol in Scotland (but they don't actually show the results of any such modelling, which is a bit disappointing)
• Singleton et al. (open access) find that a university located in a town that loses an English Premier League team (due to relegation to the Championship) suffers a reduction in undergraduate year-to-year admissions growth by 4–8 percent
• Ozkes et al. find that human players of the ultimatum game do not differentiate between human and algorithmic opponents, or between different types of algorithms, but they are more willing to forgo higher payoffs when the algorithm’s earnings benefit a human (this has interesting implications for how humans interact with AI)
• Gjerdseth (with ungated version here) finds that the destruction of ivory does not reduce elephant poaching rates, using CITES data from 2003 to 2019 (for more on this topic, see this post and the links at the end of it)
• Hagen-Zanker et al. (open access) use data from a large-scale survey conducted in 25 communities in ten countries across Asia, Africa and the Middle East, and show that there is little consistency in the individual-level and community-level factors that are associated with migration intentions, although women are less likely to have migration intentions, while those with access to transnational social networks are more likely to have migration intentions

This week in research #48

It's been a quiet week in terms of my keeping up with research, as I've been travelling. However, here's what caught my eye in research over the past week:

• Rasmussena, Borb, and Petersen merge Twitter data with Danish administrative data, and find that individuals with more aggressive dispositions (as proxied by having many more criminal verdicts) are more hostile in social media conversations, and that people from more resourceful childhood environments (those with better grades in primary school and higher parental socioeconomic status) are more hostile on average, as such people are more politically engaged

In other news, as I said above my wife and I have been travelling this week. We started in Texas, then Oklahoma, and now Arkansas (with Alabama, Mississippi, and Louisiana to come). While in Texas, I had the great pleasure of meeting Cyril Morong, The Dangerous Economist:

Next week may also be fairly quiet on the blog, as I'll be at the North American Regional Science Congress in New Orleans. And, New Orleans, of course.

Book review: How Big Things Get Done

There are certain books that shouldn't need to be written. Inevitably, those are the books that, in reality, most need to be written. That is certainly the case for How Big Things Get Done, by Bent Flyvbjerg and Dan Gardner. This is a book about big projects, and importantly, how those projects succeed or, as is often the case, how they fail. As the authors note in the preface, it is a book that aims to answer a number of important questions:

Why is the track record of big projects so bad? Even more important, what about the rare, tantalizing exceptions? Why do they succeed where so many others fail?

The book draws on decades of Flyvbjerg's academic research on big projects, as well as his experience both consulting on, and being directly involved in, big projects. Through this work, Flyvbjerg has developed a massive database of projects, their cost and benefit estimates at the time the project began, and the cost over-runs and benefit shortfalls that so often resulted. The numbers do not make for easy reading, and the examples that Flyvbjerg uses range from transport infrastructure to It projects to nuclear power stations to the Olympic Games. On the latter, the book is a useful complement to Andrew Zimbalist's book Circus Maximus (which I reviewed here).

Flyvbjerg and Gardner spend a lot of time discussing failed projects, but devote substantial space to discussing successes, such as Terminal 5 at Heathrow. Many of us will remember the opening of Heathrow for the terrible problems associated with baggage handling in the first few days of opening, but the project itself delivered on time and on budget. Once you read this book, you'll realise just how extraordinary that accomplishment is.

Flyvbjerg and Gardner use the comparison between successful projects and failures to draw a number of lessons. Most of the lessons seem obvious, but clearly those lessons have not been learned well enough in the 'big projects' space, because they are so often not heeded. The biggest lesson of all is to 'think slow, act fast'. Thinking slow means spending substantial time planning before the project begins, ensuring that the risks are well known and have been planned for, before the first spade turns the first sod. Acting fast means completing the project as quickly as possible, to avoid the 'unknown unknowns' from impacting the project - the more delays, the more time there is for something unforeseen to happen.

The 'think slow, act fast' approach seems inconsistent with Silicon Valley's approach to development (as ably described in Jonathan Taplin's 2017 book Move Fast and Break Things, which I reviewed here). Flyvbjerg and Gardner anticipate that counterexample, and note that the two are not inconsistent at all, because:

Planning is doing: Try something, see if it works, and try something else in light of what you've learned. Planning is iteration and learning before you deliver at full scale, with careful, demanding, extensive testing producing a plan that increases the odds of the delivery going smoothly and swiftly.

That is, more or less, what the big tech firms do. Flyvbjerg and Gardner note that iteration is key to those firms' development process, and is generally successful (or where it isn't, the firm can rapidly iterate to something new). In contrast, most big projects are delivered using a 'think fast, act slow' approach that is doomed to failure. 

I really enjoyed this book, even though it does seem quite depressing at times, just how badly big projects are at delivering on their promises (both in terms of costs, and in terms of benefits). The book is not only well researched, but draws on many interviews that Flyvbjerg has completed with people in the industry. The writing did make me wonder what Gardner's contribution was - the whole book is written as if by Flyvbjerg alone (with lots of "I" and "my"), which seems an odd stylistic choice for a co-authored book. Nevertheless it is an enjoyable read, and definitely recommended.