56 – Thinking like an economist 18: Constructive roles of economics

This week I consider how economics can contribute constructively in an organisation dealing with agriculture, natural resources or the environment. How can economics particularly help?

The following few observations reflect my experience in applying economics in several organisations dealing with agriculture, natural resources or the environment. In most cases, I am referring to the type of economic modelling that involves representing a fair amount of biological and physical information within the economic model. I call them “bioeconomic” models.

Economics as a tool for integration

Some types of economic model require the economist to work with other disciplines. For example, in building a model to analyse the options for managing a pollution problem, we rely on others to help us understand and quantify the available strategies for pollution abatement, the impacts of those different strategies on the level of pollution, and the the effects of pollution on health, the environment, or businesses.

Economic models of this type provide a framework for pulling together the various disciplines into a coherent whole. They force different disciplines to pitch their contributions at a level that is suitable for the decisions that need to be made, avoiding the common problem of scientists providing information at too fine a scale. Everyone contributing to the model has to operate at a similar level of resolution. I find that working with other disciplines to develop an economic model often forces the disciplines involved to talk to each other in ways they would not otherwise have done. It also clarifies how the different aspect of knowledge should be fitted together to address the problem. Even if the outcome being sought from the decision is not financial, an economic-style framework, applied well, can provide slots for all the relevant information, can help the players see which information is relevant and needed, and ensures that the task is tackled in a holistic way. I don’t see any other approach providing all this.

Asking the right questions

In dealing with managers and other scientists, I have many times found my most valuable role to be in clarifying the questions that we need to address, in order to resolve the issue at hand. This is partly about getting things pitched at the right level of detail, but it is also about having an intuitive feel for the elements of a well-structured decision problem, and recognising what is missing in any particular case.

Dealing with the trade-offs between goals

In agriculture, natural resource management or the environment, it is rarely the case that there is a single high-level objective, such as increasing profit. Usually we are skating around between several objectives, some of which work together and some of which conflict. For example, we might be concerned about risk, resource degradation, downstream impacts, or social impacts, as well as profits. If it is possible to relate those objectives to the available management options, then it is possible to include them in an economic model, which can then be used to tease out the trade-offs (or synergies) between them. If it is not possible to specify the relationships between actions and outcomes, then they can’t be meaningfully considered in the decision,

Broadness through economics

Sometimes economists are justifiably criticised for being too narrow in their analyses. In particular, we often are accused of paying too little attention to distributional consequences and issues of fairness. Nevertheless, a good economic analysis of an issue in agriculture, natural resources or the environment can bring forward a much broader set of considerations than is likely to occur otherwise. It can bring in big-picture considerations, such as external costs from using resources in the proposed way, flow-on effects (e.g. through a farm business, or through the economy), and the distributional consequences of a policy or action (though not whether a particular distribution of benefits is to be preferred).

Protecting the broad public interest

A further big-picture contribution that economics can make is representing the broad interests of the community at large. We remind those making a decision that public money spent in a certain way has to be taken away from other possible uses, so any policy proposal has an “opportunity cost”. We remind people that removal of funds from private individuals or businesses through the tax system means that the funds will not be spent in the ways that would have been most beneficial to those people, as judged by them. For those two reasons, we insist on considering and weighing up the benefits and costs of proposals (if not quantitatively, than at least qualitatively) (see PD#8).

David Pannell, The University of Western Australia

Further Reading

Pannell, D.J. (1996). Lessons from a decade of whole-farm modelling in Western Australia. Review of Agricultural Economics 18: 373-383. full paper (61 K)

Pannell, D.J. (1999). On the estimation of on-farm benefits of agricultural research, Agricultural Systems 61(2): 123-134. full paper (61 K)

Pannell, D.J. (2004). Effectively communicating economics to policy makers. Australian Journal of Agricultural and Resource Economics 48(3): 535-555. full paper from journal (138K pdf) also available via the Journal homepage: http://onlinelibrary.wiley.com/doi/10.1111/j.1467-8489.2004.00256.x/abstract

Pannell, D.J. (2004). Is economics hard hearted? Pannell Discussions, No. 8, 12 July 2004,

 

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