What is value? What does it mean to value something? How do you measure how much people really value things?
Value plays a central role in how we measure the economy. It underpins the prices we pay for things, and the utility we assume people derive from their economic pursuits. The word “value” is right there in the measurement of the economy: Gross Value Added is one of our key measures of the economy, especially at the industrial and regional levels.
As the economy has become more complex, more intangible and more threatened by climate change, I think value has become more important. For many modern businesses, productivity is much less important than value-added. Measuring the output of many service and knowledge-based industries is much more about what value they provide – and can secure payment for – than how much actual output they produce.
And yet most strands of economics show surprisingly little curiosity about value. From my very light reading, it seems as though the question of value was largely settled in the early 20th century. Value is measured by the prices people pay – or are provably willing to pay – for things. But I increasingly doubt that prices are a good guide to value in all cases. Some things we pay far too little for, and some things perhaps too much. What if our approach to measuring value has loss effectiveness just at the moment where value is more critical than ever to understanding the economy?
I hope this piece will be the start of a quick mini-series on value, looking at all the ways in which we might be misunderstanding value, and possibly suggesting some solutions, if I can find any.
How much would you pay for clean water coming out of your tap? If you live in a developed economy, you’ve probably never had to think about it much. I can guess what you *pay* for clean water – and can count its contribution to GDP (just under £9 billion in 2021, less than half a per cent of GDP). I can also, thanks to natural capital accounting, work out what share of that GDP contribution is attributable to the work of a water company, and what share we get for free from the natural environment. But I’d struggle to pin down how much you value that clean water.
This is in some ways a classic case of consumer surplus – where we get far more value from something than we pay for. But I’m not sure consumer surplus fully captures what’s going on with the value of water, or with any of the myriad other valuable endowments we get from the natural environment (air, sunlight, food and so on).
Part of the issue is that I think value – or at least people’s assessment of value – changes with scarcity. I don’t mean that price changes with scarcity – that’s obvious. I mean that how much we actually value things changes with scarcity. In the same way that dirt becomes incredibly valuable in Kevin Costner’s Waterworld – far beyond its actual usefulness in that case – the same applies to the other bits of the natural environment.
I am pretty certain that if everyone had to live for a year without clean water, the value we collectively place on it would rise. And I’m also pretty certain this would have implications for how we treated water – how much we conserve it, how much we invest in protecting it, how much attention we pay to risks to our water supply.
The underlying issue is that water, air, sunlight are, at some level, infinitely valuable to humans. A world without *any* of these things could not sustain life (and good luck valuing things in that case). The only reason we can value water, air, sunlight anything less than infinitely is that our planet gives us such a remarkable abundance of them.
But that abundance is now rather quickly being eroded to the point it can no longer be taken for granted. And that should, in time, lead to natural endowments being valued more highly than they are at present. That can’t come quickly enough – after all, the degradation of our natural environment is happening primarily because it has been undervalued, and probably also undercounted. Unless that under-valuation is reversed, we are likely to massively reduce human welfare over the coming centuries.
The purpose of this enquiry is not to seek a perfect measure of value. It is to explore whether we can change some of our decision-making. But as people in the corporate world like to say, what is measured is what is done. It is hard to protect something so fundamental to our wellbeing as nature’s endowment if we don’t value it properly.
We do already have a method for incorporating nature into the national accounts: it’s called “natural capital”. The idea is to measure the contribution of nature in the same way we measure other productive capitals – physical capital, human capital, intangible capital. But, having spent several years myself trying to make natural capital useful, I am sceptical that it is the right answer.
The issue is that natural capital is primarily based on market values, like the rest of the economy. It measures what people pay, not what they value. The value of the UK’s endowment of freshwater, for instance (£7bn a year, or £134bn total), comes from the share it contributes to GDP. There was one episode in the early days of natural capital accounting where the UK’s natural capital feel quite sharply – but only because oil prices had decreased (oil and gas reserves are of course a part of our endowment from nature).
Environmental economics – the one discipline of economics that really does take value seriously – has a much wider set of tools for valuing nature. These range from using revealed preferences – how much people spend travelling to recreation sites, for example – to contingent valuation, where you ask people what they'd be willing to pay for things. These approaches have their merits – and should be taken more seriously in wider economic decision-making – but they do not have the impact they should on government policy or investment. There is, to be honest, a lot of consumer surplus out there, and not that much GDP by comparison. Because valuations of the environment mainly form part of the much larger pool of welfare, rather than the narrower pool of things we actually pay for, they tend to be more easily ignored. With grave consequences.
There are no easy fixes to this problem, and I’m not convinced that trying to integrate nature into GDP figures is likely to be a satisfactory answer. But I would be tempted to go further, in two ways.
First, I would put much more emphasis on how valuations change with scarcity. When asking people to value the natural environment, we shouldn’t just consider how valuable it is in the status quo, but also as it gets degraded. Exposing more of this hidden value might help make the political case for cleaner air or water.
Second, we may need to adopt more formal limits to the degradation of nature, perhaps to be used alongside GDP and commitments like net zero. In his review for the UK government, Parthiv Dasgupta set out a clear case that our demands on nature must not exceed its supply. Kate Raworth’s “Doughnut” concept includes various planetary limits that a sustainable economy cannot exceed. While these limits would be contentious and hard to set – the state of nature is extremely hard to measure – the idea of having some hard limits, to stop us sliding into serious scarcity, is worth considering.
Neither of these suggestions is an alternative to meaningful action on climate changes and nature. Valuing things – whether in cash terms or by hard limits – does not guarantee action, but it is an important first step. It is one we need to take quickly, or else we might know what we’ve got ‘til it’s gone.