James Shaw’s State of the Planet speech called for a new economic model – sustainability economics – to meet environmental and equity challenges ahead.

While his call comes from the left, it reminded me of earlier criticisms of mainstream economics from the right. When I was in graduate school in the late ‘90s, a new thousand-page economics textbook was making the rounds. While the text’s fans claimed that its revolutionary free-market approach was needed to solve problems in the existing canon, more level-headed professors summed it up more trenchantly. “What’s new in it isn’t true, and what’s true in it isn’t new.”*

The same might be said for sustainability economics.

That is hardly to dismiss the problems Shaw there raised – or that were echoed in Labour’s election manifesto.

He warned that New Zealand’s economic model isn’t working. He cited “dirty rivers, polluted drinking water, entrenched poverty, growing wealth inequality, road congestion, house prices and homelessness” as some of the consequences, along with last year’s change in government.


Balancing outcomes
He argued for new models of economic thinking to balance economic, environmental and social outcomes.

But the real problems among those that Shaw points to are symptoms of bad policy rather than bad economic models. When governments fail to apply the lessons of mainstream economics to real policy problems, we should not fault the models for the poor outcomes.

Most obviously, mainstream economics has standard ways of dealing with pollution, congestion, and other environmental externalities. If there is a principles-level microeconomics textbook out there that does not cover externality problems, I have yet to see it.

Mainstream economic theory suggests time-of-day charging on congested roads when the costs of congestion are high and when time-of-day charging is feasible.

Auckland has congested roads not because of any need to replace mainstream economics with a sustainability-based alternative. Auckland’s congestion problems have rather less to do with failings of economic theory and rather more to do with central government’s refusal to allow Auckland to use mainstream solutions.

The case for better water management also seems clear. When America had problems with acid rain from excess sulphur dioxide emissions, it implemented a cap-and-trade regime to reduce emissions to sustainable levels. Inefficient plants shut down, others cleaned up, and acid rain ended.


Trading regimes
These kinds of trading regimes are built on mainstream economic theory and they work. They could also work well to keep New Zealand’s rivers, lakes and aquifers clean.

You do not need to turn to fringe theories to recognise that housing shortages can be alleviated by simply allowing developers to build more housing in the places that people want to live.

What’s true in sustainability economics is hardly new. We do not need new economic models to deal with pollution, congestion, or even the housing shortage. But we do need better policy.

The critics are right that economic growth isn’t everything. Achieving stronger economic growth by ignoring environmental externalities is like a company achieving higher short-term returns by cheating its suppliers. It cannot last.

But the solution is hardly to abandon economic growth or to downplay its importance. Long term sustainable economic growth built on policies that reflect economic reality is the only thing that can raise living standards and address the problems of entrenched poverty to which Shaw points.

Textbook solutions to externality problems let us achieve economic growth without ruining the environment.

Mainstream economic models also have the added advantage of identifying which problems are substantial and in need of correction, and which are not.


Cleaner rivers
The case for cleaner rivers is reasonably simple. If polluters do not need to weigh the costs they impose on other water users, they will let too much pollution into rivers and streams. Current regulatory regimes mitigate the problem but can be improved upon.

The same does not hold true for zero-waste policies. Landfills are cheap to build. Land for landfills is hardly scarce. Regulation can ensure that landfills are constructed to avoid leaching waste. And if tip fees are set to fully recover the costs of properly building, maintaining, and retiring landfills, the cost of dumping rubbish automatically encourages people to reduce the amount of waste they produce.

Policies that attempt to reduce waste to zero automatically cost more than the environmental value they provide.

Shifting from standard economic models to sustainability-based alternatives risks losing the scale provided by mainstream methods for weighing alternatives, making it too easy to adopt policies that cost the country far more than the value provided.

The political right has framed sound policy addressing externalities as being too costly for economic growth. In doing so, it made it too easy to cast economic growth as the enemy of sustainability.

We need to re-emphasise the parts of the mainstream economic textbooks that are hardly new, but are true.

* This is not an invitation to email me defending the merits of the doorstop textbook that will not be named. I will not reply to those emails. Life is too short.