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Don’t ignore the opportunity cost

  • Published at 11:21 pm September 8th, 2018
Economic growth does not have to come at the cost of environmental integrity BIGSTOCK

A Bangladesh 10 times richer won’t have problems with climate change

That Bangladesh didn’t cause global warming nor climate change is true -- there are emissions from all that rice paddy but it’s the industrialized nations largely responsible all the same. It’s also true that Bangladesh, if it remains poor, is going to have problems adapting to climate change.

This isn’t though a good enough argument to spend our time and effort insisting those richer countries pay up for the damages. Quite the opposite in fact, a modicum of basic economics tells us that that’s entirely the wrong course of action.

We need to understand two things: The reality of opportunity costs and the transformational powers of economic growth. Once we have we can start to take issue with the likes of Shaila Shahid of ICCCAD. We are told both that women are going to have it worse from climate change and also that the rich countries should be paying for the damage they’ve caused. 

Both might even be true but they’re entirely not useful.

Gender equality is an outcome of economic growth. This will sound harsh but it’s true as I’ve pointed out before. When children die in their droves from poverty related diseases then women need to be devoting life’s efforts to having enough children that the species survives.

It’s only when there’s an economic surplus allowing a scaling back on the number of pregnancies that there’s even time in a life to become educated, to work in the market economy and so on. It’s precisely that we have economic growth that enables that economic emancipation of women.

It’s worth noting that, absent religious pressures, this has happened absolutely everywhere there has been that economic growth.

This is not the only form of transformation that growth brings. Just to illustrate the power of compound growth, consider the rule of 70 --not wholly accurate but good finger mathematics. If something grows at 1% compound then it doubles in 70 years. If GDP grows at 2% a year then it doubles in 35 (70 divided by 2). At 8%, not far off the Bangladeshi economic growth rate, the economy is 10 times the size in only 30 years. GDP per capita of $15,000 a year instead of today’s $1,500 will solve an awful lot of problems, won’t it? 

There might be those who think that we cannot have that sort of growth. To which there are two useful responses: The first being that a number of countries have done it, most recently China, and both India and Bangladesh have been near to that in recent years. Not to mention that South Korea, Japan, Hong Kong, Singapore, and others have done it just since WWII. It is definitely possible.

But much more than that, that it will happen is a basic assumption in our very forecasts of climate change. The economic models which underlie the entire concern already assume that the global economy will be five to 11 times larger than it was back in the 1990s. This is the very place we get our concerns from, if all that growth comes from fossil fuels then we’ve that global warming problem.

If it all is powered by renewables then we don’t actually have a problem at all. But do note that vital point -- in order for us to have a climate change problem we have already assumed massive growth in the economy. So we cannot say that we cannot beat climate change through growth, that thing we’ve already assumed we’re going to have.

Which brings us to the economists’ favourite point: Opportunity costs.

And there are always opportunity costs. A reasonable definition being the things we can’t do because of the things we decided to do. The deeper point being that will live in a world of scarce resources. An economic resource being one that is scarce, a scarce one being an economic one, the definitions are circular. That means that any time we use an economic resource to do the one thing then we cannot do all of the other possibilities with that same thing.

To an economist that definition of “resource” is very wide indeed. We don’t just mean that if we make a table out of that tree over there then we cannot also make a chair out of the very same piece of wood -- the cost of the table is thus the price of not having a chair. It is that the price of anything is all of those things that we could not do with those resources. This definition is so wide that it even extends to government.

We all should have noticed that many governments don’t do all the things they try very well. A more realistic view would be that only a very few governments do any of the things they try well at all. Good governance being a scarce resource, if we use all that power and attention to do one or other thing then we cannot also use it to do this other. The cost of a government plan is, thus, all the other plans we cannot follow because we are doing this one.

Thus we’d rather like our government, wherever we are and however rich the society is, concentrating upon just the few ideas and aims. On which basis we can now examine this idea that we should be worried about how women specifically will deal with climate change. Or whether the rich countries are going to pay us for global warming. And then comparing those concerns with what we know will solve both of them anyway, plus a lot of other things -- economic growth.

That is, we should be insisting that these minor matters be ignored in favour of all government attention being focused on just improving the economy itself. Get that engine of growth moving -- we can see that it can be locally here in Bangladesh, we can see it can be done for decades elsewhere in the world -- and don’t suffer those costs of concentrating upon those minor matters.

A Bangladesh that is 10 times richer than today won’t have problems with either climate change or gender equality -- or at least not to any scale. So that’s what we should be concentrating upon, obviously enough.

Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.