And now: the good news...
4 Mar, 2009 10:02 am
These days, media are flooded with news about falling national products. ?Strongest fall since the 1980s?, or ?since the 1930s?, is a typical headline, which is supposed to induce a lot of gloom, because politicians, business leaders and the press tend to feel that national product is identical to welfare. However, a closer look suggests that the news is not all bad...
This is good news, though it is also ironic. What international treaties and the
This good news points to a weird aspect of the indicator ‘national product’. This is the strange way external costs are handled by those calculating it. External costs are costs of production and consumption shifted unto others. For instance man-made climate change leads to sea level rise, which in turn leads to coastal erosion. However the costs of such coastal erosion are not borne by those who cause sea level rise, but by those who suffer from coastal erosion. Similarly the costs of air pollution in cities and along highways in
The importance of external costs has been an issue since in the 1920s the economist Pigou wrote extensively about the subject. Pigou argued that external costs should in fact be borne by those causing them, because doing otherwise would reduce welfare. This wise advice has to a large extent been neglected by politicians. They formally subscribed to the ‘polluter pays principle’ but often acted otherwise. People calculating national products go even further. They actually add the costs for mitigating coastal erosion due to climate change and the medical costs of air pollution to the national product. This way of calculating national product means that increasing external costs adds to welfare. This is absurd.
Currently there is a lively interest in correcting absurd aspects of the way the economy has functioned in recent years. This seems a good moment to dump national products as they are currently calculated.