Elsevier

Ecosystem Services

Volume 3, March 2013, Pages e1-e10
Ecosystem Services

What have economists learned about valuing nature? A review essay

https://doi.org/10.1016/j.ecoser.2012.12.002Get rights and content

Abstract

The question of value has occupied the human mind for millennia. With the ascent of neoclassical welfare economics in the twentieth century, “value” was constrained to chrematistics, or exchange value in a market economy. This narrowing of meaning allowed economists to use a precise mathematical framework to highlight the contributions of nature both to local economic activity as well as to economic growth in general. Nevertheless, current controversies in valuing the cost and benefits of long-lived environmental changes like climate change and biodiversity loss have exposed serious flaws in standard welfare economics. Many of these arise from the assumption that social value can be calculated using the revealed or stated preferences of self-regarding, narrowly rational individuals. New findings in behavioral psychology, neuroscience, and social anthropology have shown that human decision-making is also a social, not only an individual, process. This review essay examines the contributions of standard welfare theory, its shortcomings, and the necessity for more realistic valuation models based on truly social preferences.

Highlights

► The concept of value has been severely restricted to “chromatics” or value in exchange. ► Current debates about valuing biodiversity and climate change have uncovered flaws in the standard economic approach. ► Many shortcomings of the standard model arise from the assumption that human preferences are self-regarding. ► Science of ecosystem survey moved sketch on insight from behavioral economics, evolutionary psychology and social anthropology.

Section snippets

Introduction: a short history of economic value theory

Contemporary notions of economic value have deep roots in Western belief systems. Specifically, anthropocentric concepts of value are deeply rooted in the Helenic and Judeo-Christian tradition. In 1440, Cusanus (Nicholas of Cusa) reasoned that human will and judgment was God's way of establishing the value of the things he created. God created human preferences as a way of organizing the world as a system of values. Without human judgments, created things would be mere material goods, which in

Progress in valuing nature in neoclassical welfare models

The 1950s saw the beginning of renewable resource economics with the establishment of Resources for the Future and the work on fisheries by Gordon (1954). In the 1960s, spurred by the emerging environmental movement, the sub-discipline of environmental economics emerged, built on the foundations of welfare economics (Pearce and Turner, 1990). A major step in incorporating the environment into neoclassical welfare economics was to introduce the concept of natural capital—the extension of the

Applying welfare theory to environmental valuation: successes and limitations

Valuation exercises are typically part of cost benefit analysis (CBA)—the practical application of neoclassical welfare theory to public policy. In its neoclassical welfare form, CBA is based on identifying changes in consumer and producer surplus resulting from public policies. Justification for applying CBA is based on the Hicks–Kaldor compensation criterion or the Potential Pareto Improvement, in which a policy is justified if winners could compensate the losers and still be better off, even

Unresolved environmental valuation issues

As discussed above, the neoclassical approach to environmental valuation has come a long way toward accounting for the contribution of the natural world to human welfare. Nevertheless, recent debates about the economic valuation of biodiversity loss and climate change have exposed some serious shortcomings of the basic economic model. The basic economic model is essentially a financial investment model for an individual making a purely economic decision at a given point in time (Gowdy, 2004,

Truly social valuation: the next frontier in environmental valuation

There is a growing feeling among many economists that neoclassical welfare economics has reached its limit (Bowles and Gintis, 2000, Gowdy, 2004, Quiggin, 2010). Davis (2006) suggests that, since the 1980s, the dominance of neoclassical economics has been supplanted by competing approaches sharing little in common with each other or with neoclassical economics. Major alternative approaches include behavioral economics, non-linear complexity theory, evolutionary economics, evolutionary game

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