The Environment Canada Policy Research Seminar Series

Dr Richard Lipsey June 7, 2002

On Friday, June 7, 2002, the Environment Canada Policy Research Seminar Series hosted Dr Richard Lipsey in a talk entitled "How economic growth and environmental protection can be compatible?". The following is a précis of Dr Richard Lipsey's talk.

On June 7th, Professor Richard Lipsey delivered a stimulating overview of key economic teachings regarding the workings of markets. He shared an assortment of thoughts about how these insights can assist in predicting and managing environmental outcomes.

Markets have and will continue to play a valuable role in satisfying our needs and enhancing our well-being, including through environmental improvements. Noted 18th century classical economist, Thomas Malthus, expressed great pessimism that the world would be capable of feeding a population greater than 2 billion. He couldn't imagine that the earth would one day have a population over 6 billion while, at the same time, some food producing markets would experience large agricultural surpluses.

Economic growth is a powerful force that has increased real income and improved the quality of our lives. Our cave ancestors would never have dreamed our standard of living possible. They'd have been impressed by a safe secure food supply and the ability to live to the age of 25. Cancer, heart problems, and other maladies that affect us in old age, would hardly have been heard of in this era. A factor driving growth is that we have access to greater knowledge than our forebearers. Simply being able to record knowledge increases progress by a factor of two.

Long-term growth has been largely driven by technological developments that have emerged in response to societal needs. Though technological advances sometimes introduce new problems, the benefits must generally outweigh the problems they create if they are to be adopted. Over time, this leads to greater efficiency with less impact on the environment. Karl Marx correctly asserted that technology can transform society, for instance, the emergence of agriculture, or the three-mast sail. Moving from typewriters to computers provides an example of what technologically-driven economic growth has accomplished within our lifetimes. In the past decade, information communication technology has resulted in firms becoming flatter. Though this hasn't yet hit governments in a pronounced way, there could be future benefits from organizing information and resources along issues in a manner that would cut across departments.

Throughout history, as is true today, excess growth has been feared and associated with a host of negative consequences. However, economic growth is not a matter of merely doubling and redoubling existing output continually. For instance, in the Victorian era, a pessimist about the benefits of economic growth would have contended that we would eventually be producing 5 times the number of horses and buggies. However, the pattern of economic production changed greatly as the economy grew, and in ways that could not have been anticipated.

The driving force of market societies is self-interest. It is true that people think beyond their own well-being for some significant, highly public decisions. Altruism could drive behaviour in small homogeneous societies. However, for our modern day-to-day economic and production decisions, our behaviour depends largely on self-interest.

Free markets often perform allocative functions quite well. Markets, through the price system, provide signals. Plentiful resources are assigned low prices, while scarce resources have high prices. Through markets, actors are coordinated with no single entity explicitly in charge.

Consumers and businesses will do all they can to substitute scarce (and hence high-priced) resources with abundant ones. For instance, the oil price spikes of the 1970s reduced gasoline consumption and spurred cost-saving technological innovations (e.g., smaller more fuel efficient vehicles) and this activity quickly ceased afterwards once prices fell. Though quite removed from the present, we can conceive of a distant date, say in over a century, when the supply of solar & wind power are so abundant that there will be little further need to conserve electricity, and this would be reflected by declining prices.

Private property has been a remarkable human institution. For instance, forestry companies that lease land have no incentive to care for it. The market for organic foods, particularly in Europe, provides an example of how the incentive of profits can encourage environmentally friendly production

An impediment to the workings of markets are trade barriers. In the developed world, tariffs and non-tariff barriers were erected as a means of coping with the Great Depression of the 1930s. These barriers have come to limit the markets for less developed countries, while in turn, developed countries export subsidized agricultural products. Enacting selective trade barriers often provides the opportunity for industries in developed countries to lobby for policies in their interest, but perhaps to the detriment of the overall efficiency of the national economy, and other economies, particularly those of less developed countries. Inefficient production techniques pose environmental threats, rather than international trade itself. Free trade agreements are not the arena for environmental or labour rules. With the higher incomes associated with economic growth and expansion of international trade, less developed countries would also call for improved environmental conditions.

Though markets generally do well, governments need to institute controls when market incentives are insufficient to protect the environment, such as when domestic and regional actions affect common resources or to limit the externalization of environmental costs. Governments should also monitor for potential environmental "flips", that is, sudden deteriorations in conditions of the environment. Climate change holds the potential for such an abrupt transition.

It should not be necessary to establish full scientific certainty before acting on an environmental issue. There is some level of "rational ignorance" – once policymakers understand the gist of a potentially consequential environmental problem, they should employ the Precautionary Principle to thwart its escalation, without necessarily needing to know that disaster would otherwise be certain.

In the question period following the presentation, a number of audience members challenged Dr. Lipsey's optimism about our future path and his faith in the capabilities of markets to cope with environmental problems like imperfect information and transboundary environmental issues. The active discussion demonstrated the wide range of thought about the future conditions of the economy and environment and the potential for the free play of market forces to address environmental concerns.

Biography

Dr. Richard Lipsey is Professor Emeritus of Economics at Simon Fraser Univsersity. He has held a Chair in Economics at the London School of Economics and was Chairman of the Department of Economics and Dean of the Faculty of Social Science at the University of Essex, England. He has also held appointments at the University of Manchester and City University in England, the Universities of California (Berkeley), Colorado, Wisconsin, and Yale in the U.S., and Queen's University and the Universities of British Columbia and Victoria in Canada.

Prof. Lipsey has authored several textbooks in economics that are used throughout the world. A generation of Canadian students were introduced to the study of economics through Professor Lipsey's Introduction to Positive Economics. His current research interests deal with technology and growth, including interactions and impacts in environmental and social domains.

List of articles and reports by Dr Richard Lipsey

Compiled in support of an Environment Canada Policy Research Seminar,
held in Hull on June 7, 2002.

1. Archibald, G.C. & Lipsey, R.G. An introduction to a mathematical treatment of economics. -- London : Weidenfeld & Nicolson, 1967. -- 399 p.
   
   
2. Bekar, C. & Lipsey, R.G. Clusters and economic policy. -- Toronto : CIAR, 2001. -- 14 p. -- (ECWP ; no. 157).
   
   
3. Carlaw, K.I. & Lipsey, R.G. Externalities versus technological complementarities : a model of GPT-driven, sustained growth. -- Toronto : CIAR, 2001. -- 57 p. -- (ECWP ; no. 156).
   
   
4. Carmichael, E.A., Dobson, W. & Lipsey, R.G. The Macdonald report : signpost or shopping basket? Canadian public policy = Analyse de politiques (1986) 12 (Suppl.) : 23-39.
   
   
5. Henriksson, L.E. & Lipsey, R.G. Should provinces expand gambling ? Canadian public policy = Analyse de politiques (1999) 25 (2) : 259-275.
   
   
6. Lipsey, R.G. Wage price controls : how to do a lot of harm by trying to do a little good. Canadian public policy = Analyse de politiques (1977) 3 (1) : 1-13.
   
   
7. Lipsey, R.G. Taking the initiative. -- Toronto : C.D. Howe Institute, 1985. -- 183 p.
   
   
8. Lipsey, R.G. & York, R.C. Evaluating the free trade deal : a guided tour through the Canada-U.S. Agreement. -- Toronto : C.D. Howe Institute, 1988. -- 139 p.
   
   
9. Lipsey, R.G. Unsettled issues in the great free trade debate = Quelques questions en suspens dans le grand débat canadien sur le libre-échange. Canadian Journal of Economics = Revue canadienne d'économique (1989) 22 (1) : 1-21. Texte en anglais, résumé en anglais et en français. The Harold Innis Memorial Lecture, delivered at the annual meeting of the Canadian Economics Association, 3 June 1988. Texte présenté à l'occasion de la réunion annuelle de l'Association canadienne d'économique.
   
   
10. Lipsey, R.G. A crystal ball applied to Canadian economics. Canadian Journal of Economics = Revue canadienne d'économique (1993) 26 (1) : 70-76.
    
    
11. Lipsey, R.G. Current research interests. -- Burnaby, B.C. : Simon Fraser University, 2001. Working papers downloadable in PDF format, list of published works on technological change and long-term growth, other working papers, book outline : http://www.sfu.ca/~rlipsey/res.html.
    
    
12. Lipsey, R.G. The productivity paradox : a case of the emperor's new clothes. -- Toronto : CIAR, 2001. -- 14 p. (ECWP ; no. 158).