In the industrialized world over the past century, progress has been measured mostly in terms of economic efficiency and growth. Adverse environmental, social and health impacts of economic change have never been tallied up as costs. Productivity, which measures the efficiency with which firms transform materials and labor into products, is one of the sacred economic icons. Managers care about productivity growth because when it goes up the message is that their firm's ability to compete with others and to improve profitability and market share is improving. Workers care about it because it justifies wage increases.
Economists care because productivity growth accelerates economic expansion.
Because this key economic indicator began to lag in the United States in the early 1970s, just when our major environmental laws went onto the books, some have argued that the cost of complying with environmental regulations has been responsible for the productivity slowdown. According to some studies, regulations may have been responsible for up to half of the productivity decline observed in pollution-intensive industries. This shows how flaws in the lens through which we look can seriously distort our view of the world. The way the United States and other industrialized countries have been measuring productivity growth fundamentally misrepresents the industrial process and inevitably tells us that environmental protection reduces productivity no matter how great the damage that is prevented. Because in measuring productivity growth, we now take into account only pollution abatement costs and ignore pollution damages averted.