Ecological Economics

Willem Buiter Weighs in, Favors Carbon Tax

It is nice to see that Willem Buiter shares my skepticism about Cap and Trade Carbon schemes relative to Carbon Taxes. It is nice because his London School of Economics credentials eclipse mine, and those are just the beginning of why he is held in high esteem in both financial and economics circles. After showing why Cap & Trade and Carbon Taxes are equivalent in theory under restrictive assumptions regarding uncertainty and/or market efficiency. Buiter explains in Today's Financial Times why he favors a simple Carbon Tax over Cap & Trade. Go read it! Here's a snip:

Cap & Trade is a tax on carbon emissions - fortunately! Willem Buiter, Ft.com, June 12, 2008: … An argument in favour of carbon taxes over cap & trade is that cap & trade requires an efficient secondary market. As we know from recent experience, financial market efficiency cannot be taken for granted. While the instrument that is traded in the secondary market under cap & trade is relatively simple, compared to Residential Mortgage-Backed Securities based on US subprime mortgages, cap & trade does have this additional link in the chain, and is therefore vulnerable to all the familiar financial market pathologies, from market manipulation to illiquidity.

The economic equivalence of carbon taxes and cap & trade is exact only in a world without uncertainty, or in a world with uncertainty but with complete contingent claims markets for risk trading. In the real world, where there is uncertainty and markets are incomplete ….

Why then do politicians and outfits like BP prefer cap & trade to a carbon tax? The politicians prefer it because the cap & trade scheme, while economically equivalent to a tax, will not count as a tax in the traditional record-keeping manuals. It does not add to the official 'tax burden' the opposition likes to bash you around the head with. You can present cap & trade in a way that hides/obscures the fact that for it to work, that is, for it to reduce emissions, it must be equivalent to a tax by increasing the marginal cost of emitting CO2E; however, it does not look like a tax and will not show up in conventional tax burden calculations. Lack of transparency means absence of accountability. That is why non-transparent arrangements are universally valued by politicians.

A second reason is that with cap & trade, you can distribute the shadow tax revenue associated with the cap & trade scheme (that is the amount of revenue you would be able to obtain for the permits in a transparent, competitive auction) in a non-transparent manner. Give-aways through explicit grants or subsidies are not as easy. There are parliamentary committees scrutinizing revenues and outlays; there may be institutions like the UK National Audit Office that can ask bothersome questions.

Life is easier with the initial allocation of permits. You can, for instance, hand out the permits free of charge to your friends (including the heavy historical polluters). This is also the reason, I believe, that the heavy emitters, including BP, favour cap & trade over taxes. They believe that the initial allocation of free permits will favour them. There is this crazy notion that past heavy polluters should not be hit too hard by schemes to reduce CO2E emissions, and that they should therefore be given gratis allowances of permits that are related to their recent past emissions record. I can see no efficiency reason in favour of this, and many a fairness argument against it, but the argument carries weight in the unreal real world.

When the problems associated with running an efficient secondary market for CO2E emissions permits and the political economy of the non-transparent initial allocation of the CO2E emissions permits are taken into account, I believe that, on balance, explicit carbon taxes are better than cap & trade.

'The Story of Stuff'

Tired of being told to "go shopping" whenever a national or international crisis occurs?

Tired of hearing that "recycling" will save us?
  Note: Recycling is a very good idea, just "not enough."

Want to know how our so-called Consumer Society was manufactured?

Want to know why the linear "produce, manufacture, CONSUME" model is so deeply flawed?

Ever wonder how stuff can be so damned cheap? And wonder who is really paying "the freight"?

Want to know more about the pathway to sustainability?

Then you'll be glad to see/hear how Annie Leonard exposes the dark underbelly of our Consumer Society in a little 20 minute educational video titled The Story of Stuff.

Here is a trailer:

More at storyofstuff.com.

PS.. If I'm the last person on the block (the Planet?) to hear about The Story of Stuff—having heard about it over coffee just yesterday—chalk it up to the fact that I'm an old, retired economist living in Utah, just a small step on the far side of nowhere. But damned good scenery!

Economic Fundamentalists v. Realists

Sometimes I amaze myself over how little I really know about economics. Too bad my economics education didn't include any real 'history of economic thought'. That, I've had to pick up on my own later. To illustrate my ignorance, yesterday Dani Rodrick focused my attention on what some call Renaissance (or 'Reality') Economics. You can find a history of the movement that spans several centuries here: The Other Cannon: The History of Renaissance Economics [DOC], Eric S. Reinert and Arno M. Daastøl .

After posting up what The Other Cannon Foundation labels contrasts between the 'standard cannon' of economic thought and 'the other cannon'(reproduced below), Rodrik says that he "cannot agree with their characterization of the conventional approach." Then he asks, "Is mainstream economics really stuck in the perfect information/perfect foresight mold? Ignores man's wit and will? It doesn't handle novelty endogenously? Cannot handle dynamics? And this is just the beginning." Rodrik concludes, "Sorry, but this is not the economics I recognize or think that I practice."

I'll take exception, and align myself — no surprise — with the "Other Canon". Rodrik and some other more mainstream economists are very much aware of broader framing for economic theory and practice, and they show it in their works. But far too many who have been schooled only via mainstream methods, texts, etc. fall too easily into the economics fundamentalists trap. So until more heterodox types, including those who might call themselves 'Renaissance', institutionalist, evolutionary economics, behavioral economics, ecological economics or 'whatever' are allowed into mainstream fora, I'll continue to align myself with those who choose to maintain the somewhat fictional divides between economists.

Following Rodrik's One Economics or Two?, readers chimed in, pro and con. Here is a sampler:

Prestopundit: Is it so hard to understand that situational learning in the context of changing relative prices is the linch-pin causal element in the explanation of economic order across time -- and that this causal element cannot be captured in mathematics or statistics?

Is it so hard to understand that people get blinded to real phenomena by their formalisms and statistics -- and they begin to mistake their "models" and socially constructed statistics for real world phenomena which their "models" could in no way represent?

You are a fool if you don't recognize that this happens in economics all of the time. …

And I won't even get started with econometrics.

Barkley Rosser: [I]n a book I wrote with David Colander and Richard Holt entitled The Changing Face of Economics: Conversations with Cutting Edge Economists(2004, University of Michigan Press), we identified "orthodoxy" as an intellectual category, "mainstream" as a sociological category (those in charge), and "heterodox" as being both, anti-orthodox intellectually and alienated from the ruling mainstream. This allows for a "non-orthodox mainstream," which I suspect Dani Rodrik may find himself having some sympathy with.

I see the term "neoclassical" as referring to an intellectual orthodoxy, one that is ossified and pretty well described by that list on the left, which does indeed look like a straw man if one thinks about research practices by many leading mainstream economists, but which is also very much present in the textbooks, and which does get enforced at many second-tier and third rate places (think Notre Dame, with its assault on the definitely heterodox economics department there).

Between those two lists, I definitely side with the right side, mostly. I do however note that not all heterodox economics is anti-mathematical (see my edited volume with Edward Elgar, Complexity in Economics, 2004). Also, some biological thinking is very neoclassical mainstream, think the Alchian-Friedman theory of why firms really do maximize profits and why speculative bubbles are impossible (duh), versus the sort of thing one finds current econophysicists and Santa Fe hanger-outers doing, which definitely draws from physics. Much of this is a matter of "what kind of physics" and "what kind of math"

No matter how one positions oneself as an economist, for 'progressive' types it is heartening to know that others outside narrow economic circles are focusing on the idea of "renaissance" or "paradigm shifts" in economics. Just the other day I got an email from the Institute for Alternative Futures highlighting a July 07 Trend Brief: Paradigm Shift Emerging in Economics [PDF] . This is one to watch. Alternative Futures note that:

Such a shift will have a substantial impact on many areas including regulatory framing, business strategy and development assistance. … However, there are still a number of forms that the emergence of new models could take. Within this context, the Institue for Alternative Futures is now developing comparative scenarios for this process as an initial step toward adapting organizations to the emerging realities of a next-generation economy.

More on 'The Other Cannon':

Ten Principles of Feminist Economics

Continuing our airing of heterodox economics perspectives, and our exposé of the mainstream, here are:

Ten Principles of Feminist Economics: A Modestly Proposed Antidote
By Geoff Schneider and Jean Shackelford

In mainstream economics today there is a particularly egregious recent trend toward producing lists of "key economic ideas" which tend to promote a narrowing of economic thinking, and in turn produce a more "scientific" and less inclusive approach to course contents. …

Since such lists represent what are widely proclaimed (by their authors) as universally accepted principles and therefore worthy of teaching to students, we might also wonder about the missing or other perspectives. Despite the inherent dangers of constructing a list that purports to cover the key economic ideas of any perspective, in this paper we yield to temptation and offer a feminist alternative to these standard principles of economics.

Some Principles of Feminist Economics [abbreviated here, omitting abstracted decriptions by Schneider and Shakelford]

1. There can be no such thing as a definitive list of the principles of feminist economics.
2. Values enter into economic analysis at many different levels.
3. The Household is a locus of economic activity.
4. Non-market activities are important to the economy.
5. Power relationships are important in an economy.
6. A gendered perspective is central to the study of economics.
7. Human beings are complex, and they are influenced by more than just material factors.
8. People compete, cooperate and care.
9. Government action can improve market outcomes.
10. The scope of economics must be interdisciplinary.

Hat Tip to Robert Vienneau, Thoughts on Economics.

Economics: Tendencies Toward 'Cargo Cult' Science

In a recently updated exposé titled Why Economics is on the Wrong Track ('book form' here [PDF], 32 pp., 2002 or find it and other McCloskey' books here) Deirdre McCloskey explicitly notes two "secret sins", argued as peculiar to economic (well, almost). These sins, which we will get to shortly, are bad enough to fill this post. But there is another sin worthy of mention. While not labeling it a sin "peculiar to economics" McCloskey notes that the economics profession, like too many others, while being both "institutionally ignorant" and "historically ignorant" is quietly dismissing its "history of economics" professors:

… Outsiders would likewise be amazed at the Historical Ignorance of the economist. They think that the scientific evidence about economies before the past few years would surely figure in an economist's data. It doesn't. One graduate program after another in the 1970s and 1980s cut the requirement that students become familiar with the economic past. I myself managed for twelve years to fend off the day of execution at the University of Chicago (now do you see the pattern?). The very month I left the department in disgust the barbarians inside the gates sent the economic history requirement to the guillotine, and since then Ph.D.s in economics from the University of Chicago have joined those at Minnesota, Princeton, and Columbia in ignorance of the economic past. At the same time almost all American graduate programs (my own fair Harvard was proudly among the first to do so) were abandoning the study of the past of economics itself. People call themselves economists who have never read a page of Adam Smith or Karl Marx or John Maynard Keynes. It would be like being an anthropologist who had never heard of Malinowski or an evolutionary biologist who had never heard of Darwin.

See also Tsvi Tisk's Utopianism Come of Age: From Post-Modernism to Neo-Modernism:

… I am absolutely dismayed at the ignorance so many professionals have of their own professions: economists and businessmen who do not know economic history or the history of economic ideas; engineers who do not know the history of technology; doctors who do not know the history of medicine or medical paradigms; teachers who do not know the history of education or educational ideas; politicians who do not know the history of politics or political ideas; scientists who do not know the history of science and scientific paradigms etc.

This lack of historical perspective and ability to critically analyze ones own professional self, in the context of ones own historical period, often results in an astounding hubris.

Note that McCloskey serves up a few more "sins" not solely attributable to economics and economists that you need to ferret out from Why Economics is on the Wrong Track. Let's look at the "sins" peculiar to econoimcs.

Two Sins Peculiar to Economics

• "qualitative theorems"
• "statistical significance"

For McCloskey, and me, the first sin is that qualitative economic theorems too often seem to have a life of their own, divorced from the contextual realities of the world. The second sin is that "statistical significance" is used as a shield to convince the gullible that "qualitative theorems" and the data that flesh them out are indeed important. Moreover, many economics practitioners aren't even aware that the 'shield' is in play, believing instead that they are being 'scientific' in ther writeups.

More below, but first, let's introduce the fourth sin via Michael Emmett Brady, in a comment from Truck and Barter on a post titled McCloskey is Oh So Wrong About Statistical Significance:

McCloskey and Ziliak [Measurement and Meaning in Economics: The Essential Deirdre McCloskey ] are correct, but they have overlooked a much more serious problem for econometricians and econometrics. Benoit Mandelbrot has spent over 50 years demonstrating that the normal distribution is not an accurate or reliable representation, in general, for most time series economic data. It is interesting that neither Frisch, Tinbergen, Koopmans, Haavelmo, Marshack et al., ever did ANY goodness of fit test on their time series data to see if the normal distribution was a sound representation of the data. Of course, Keynes asked Tinbergen very politely to demonstrate that his data sets were "...HOMOGENEOUS, UNIFORM, AND STABLE.." over time back in 1939.

No econometrician has ever shown that their time series data pass any goodness of fit test. The test Keynes suggested be used in the A Treatise on Probability on pp.420-421 was the Lexis Q test. Let's hope that future econometricians don't provide the "answer" given by Paul Cootner to Mandelbrot in 1964, which was that they were going to continue to assume normality in spite of the fact that the actual data fit the Cauchy distribution [at] best because it would be too hard to apply the Cauchy. -- February 11, 2006 6:40 PM

{edited lightly by Iverson PS. One could do worse than to read through (maybe after I retire?) Brady's "best books" on "how one should study and organize the data and observations that comprise the social sciences."}

Brady's comment is similar, I believe, to Nassim Nichalos Taleb's "ludic fallacy". Taleb's "narrative fallacy" inter-relates with McCloskey's sin "qualitative theorems" which, when embedded in journal articles become a particularly uninteresting (except to the gullible) form of story-telling. We introduced both Taleb's "fallacies" a few weeks ago.

Note: For completeness, I must mention that this terrain has been traversed many times in many ways. Here are two:

'Grand Theory' and 'Methodism' Traps

• C. Wright Mills. 1959. The Sociological Imagination: Mills suggests that too often social scientists fail to deal with things contextually, instead opting for either "Grand Theory" (unanchored to real world observation, truth-testing, etc.) or "Abstracted Empiricism"—others call this "Methodism"— (dogmatic pursuit of narrow-niche endeavors that have more to do with applying data to elegant mathematical models (or even filling up "spreadsheets" or "taxonomic structures") than which testing the fit of method to real-world endeavors.
• Andrew Sayer. 1984. Method in Social Science—A Realist Approach: Sayer devotes the appendix to detailing pitfalls of falling into either naïve "narrative" or naïve "analysis" traps.

McCloskey on "Secret Sins" (from Why Economics is on the Wrong Track)

'Happiness' as Government Policy?

To move our ethics/policy conversation along further, let's cut to the chase and talk about 'happiness'. Here is some background reading (from debatingmatters.com). What caught my attention today, however, was this from Mark Thoma (Economist's View):

Should We be Happy with Research on Happiness?

What does research on happiness tell us?:

Don’t ask the state for happiness, by Helen Johns and Paul Ormerod, Commentary, Financial Times: The idea that government policy should be focused more explicitly on promoting happiness has been gaining support. Proponents of this view argue that happiness indicators, based on surveys that purport to measure how happy people feel, have stagnated over decades. An important reason is that governments have aimed to maximise ... gross national product, rather than a more holistic indicator of welfare based on happiness.

This premise is clearly false. Politicians have always sought to achieve many things that are not designed to increase GNP. The most recent public service agreements on the British Treasury website, for example, spell out government commitments to ... increase participation in the arts...

A decades-long flat happiness trend could be showing that government policies in general fail... But this would be a depressing conclusion. Instead, happiness advocates make a scapegoat out of GNP and argue that economic growth is irrelevant or detrimental to happiness.

The alternative view is that the happiness data over time contain little or no genuine information. ... Indeed, they show no correlation with a whole range of factors that might reasonably be thought to improve well-being, such as a massive increase in leisure time, a tendency to live longer and a decline in gender inequality.

Income inequality is often claimed to be a strong determinant of happiness, and this “fact” used to argue for more progressive taxation. Yet we do not see any change in recorded happiness when inequality goes up or down. ...

Government attempts to increase measured happiness, rather than making life better for us, may well do the opposite: create arbitrary objectives that divert civil service energies from core responsibilities; give many people the message that happiness emanates from national policy rather than our own efforts; and create pressure for government to appear to increase an indicator that has never before shifted systematically in response to any policy or socioeconomic change. These are exactly the mistakes of the target-driven mentality that now pervades the British public sector. ...

More sinisterly, the happiness view of the world has tendencies that are inherently anti-democratic. The expert with his or her clipboard and regressions knows better than ordinary people themselves what makes them happy. So local democratic or individual decisions can be overridden with a clean conscience. ...

Government does not fail because it does not measure happiness; it fails when its energies are misdirected on the basis of poor quality information.

Should these data be used to draw conclusions such as government intervention may not improve well-being and may actually make things worse? John Quiggin at Crooked Timber has written about the data used to make these assessments:

What’s wrong with happiness measurement?, by by John Quiggin, Crooked Timber …

A quick Google search turned up The pursuit of happiness is so problematic by Stephen King. I think my sentiments lie pretty much with King: The pursuit of happiness is indeed problematic! We are not going to get there by attempting to add it up. Better, I think, to work it out as we go about our culture-forming (institutions) and our personal and family and community decision-making, which too can not be reduced to formulae.

Continuing with the theme of "problematic", let me conclude with these quotes on happiness which help us understand the paradoxes embedded in the term. Better to base one's life on kindness methinks, than happiness. Perhaps a rule of thumb might be: kindness through service begets happiness, but kindness/service alone is not enough. There are other things that come into play, like "purpose," "integrity" …

More Heterodoxy: Max Sawicky on 'Why Economics Sucks'

Max Sawicky (MaxSpeak, You Listen!) has been flexing his wings lately as Heterodox views on economics get more press. Here (condensed slightly) is his latest, titled The Ten Boxes of Heterodoxy, Why Economics Sucks (via TPM Cafe). Sawicky prefaces his remarks with, "I believe much of what follows is recognized by mainstream, orthodox economic doctrine. It's just that economists act as if it is not." Sawicky:

The Ten Boxes of Heterodoxy …

1. Supply and demand (1) … in practice obscures anything interesting that affects market conditions. It bespeaks militant, ideologically-based reductionism.….
2. S&D (2). The outcome in an supply and demand model in principle has no inherently attractive qualities, in and of itself, since it depends on the distribution of ability to pay. …
3. Gross Domestic Product (GDP). … Solemn assurances that GDP is not synonymous with economic welfare fall easily by the wayside. More GDP (and less leisure time, less environmental quality, a less sustainable economic future) is always better.…
4. Commerce versus The Market. …When the Federal government tries to organize markets with the buzzword of "competitive sourcing," the results are … comical. There is plenty of commerce, but there are very few markets, even though economists pretend they solve most of our problems.
5. In Search Of: The profit motive. Professors tell their gullible students that business firms maximize profits. This induces efficient use of resources and fortuitous allocation of capital. But if you study the economics of firms, even under orthodox auspices, you find out they don't maximize profits.
6. The deficit's gonna getcha. Years of braying about the evils of budget deficits have failed to be borne out by the purported consequence — high interest rates. The entire traditional macro apparatus fails to allow for the interventions of large foreign lenders who aren't dumb enough to believe what the textbooks say.
7. Capital fundamentalism. As with reductionism of the S&D model, growth modeling zeroes in on private capital accumulation, even though a) other factors are demonstrably important and beg for attention; and b) private capital accumulation may be a consequence of other factors, rather than a cause and appropriate object for policy. …
8. Every import is sacred. Regulation of markets is allowed, unless the market includes parties from different countries. Then it is strictly verboten.
9. The unnatural rate of unemployment. Economists used to say it was 6.0, maybe 5.5 percent. Lower would give rise to ruinous inflation. The huge social benefits of another couple of percentage points less unemployment were — are — implicitly discounted. Current rate is 4.5. 'Nuff said.
10. "Power? You want the political science dept." Power looms over economic transactions, except in economic theory. Workers do not hire capitalists. Consumers do not choose merchants. Shareholders do not choose managers. Voters do not choose elected officials. …

Go to Max's post (and site) for added wit, insight, rebuttals (as comments), rebuttals to rebuttals (more comments), and links to much more…

Commonsense Ethical Thinking v. Utilitarianism, Consequentalism, etc.

Seth Baum is right to lead us closer to ethics in our conversation. But we need to talk further as to utilitarianism and other forms of reasoning. In earlier private emails I mentioned to Seth the perjorative connotations utilitarianism conjures up in the minds of many who study philosophy, ethics and economics. Seth tells us he is, for now, a utilitarian— note that Wikipedia defines Utilitarianism as a form of Consequentialism. In what senses Seth believes himself a utilitarian we will have to ferret out. As for me I hate labels, categories, and what not, but know we have to use them to help us compare philosophy, method, etc.

Some years back I ran in to Elizabeth Anderson's view on some of this. Later I found her book Value in Ethics and Economics. Anderson's views made sense to me then, and continue to make sense to me today.

Value in Ethics and Economics, Elizabeth Anderson, 1993
Conclusion

… Commonsense ethical thinking is deeply pluralistic, contentious, embedded in social practices conceived in "thick" terms, and expressed through non-consequentialist norms. It lacks the unity, self-evidence, universality, and tidiness many philosophers demand of theoretically respectable claims. But the very features of commonsense ethical thinking thought to constitute philosophical vices are indispensable for self-understanding. We need to think of values as plural to makes sense of the variety of ways we have of valuing things. We need to contest their meanings to explore and cultivate our evaluative sensibilities. We need to think of valuation as embedded in social practices to make sense of their meaningfulness to others and their susceptibility to criticism and justification in dialogue with others. We need to embrace non-consequentalist norms to make sense of the higher ways we have of valuing things and other ways we make our lives meaningful over time.

The other philosophical justifications for monistic, reductionistic, and consequentialist theories of value and rationality are not compelling. Many philosophers have rejected common sense in favor of such theories because they believe that critical reflection requires that we bypass reasoning in terms of socially embedded thick concepts and think directly in terms of value-neutral facts, plus the good and the right alone. I have shown how all the forms of critical thinking worth caring about are accessible to commonsense ethical thought. If we dismiss commonsense ethical thinking, we disable the most important methods of self-criticism. Many philosophers have supported monistic and reductionistic theories because they believe that practical reason demands that our choices be representable as maximizing intrinsic value, and hence, that we be able to reduce the values of all goods to a common measure. My expressive theory of rational choice shows that we can act rationally without maximizing value or reducing all values to a common scale. …

I realize that it proves unfair to simply point to a conclusion from a book, but in the interest of time and as a 'next step' in this conversation that is what I've done. We will introduce other books, ideas, etc. in due time, but I did Google one addition up as I was trying to throw this together: Economics and Ethics, by Charles K. Wilber. It adds a bit more perspective and throws in a few more books.

So call me a commonsense ethics and economics practitioner, if you want. But I still hate categories as places to box people into.

Three final thoughts, from Anderson's Value in Ethics and Economics:

… First, practical reason cannot get by without employing the logic of evaluative attitudes …. Second, because states of affairs do not generally have intrinsic value, our attitudes toward them must be conditioned by our attitudes toward the things that do have intrinsic values. This means that the rational thing to do cannot be defined simply in terms of the pursuit of states of affairs. The rationality of pursuing states of affairs is mediated by expressive norms. The ground for pursuing them is that in doing so, we express our appropriate regard for people and other things. Third, the content of expressive norms is not given simply by specifying states of affairs to be preferred. No adequate interpretation of a way of valuing something can reduce its motivational component to a desire or preference that some states of affairs occur. They must be brought about in the right ways, by the right agents, in the right context …. Whether desiring, aiming at, or achieving a given state of affairs adequately expresses the right attitudes toward people and things depends on the context that determines its expressive meaning. (p. 29-30)

Predatory Oligarchy

Hervé Kemph is a French environmental journalist and a student of global capitalism. His book, How the Rich are Destroying the Planet has caused a bit of a stir thus far, and will likely have more impact once translated into English. Some will call Kemph's writing just another extremist environmental rant. Others, like me, will welcome it as an opportunity to examine ourselves and our culture. We will no doubt be hearing more about Kemph as time goes by. In the meantime, we have a couple of Truthout.org articles to draw from. In part:

The Rich Stand Accused, Louis-Rilles Francoeur, Le Devoir, (via Truthout.org, 01/07/07): …"We cannot understand the simultaneity of the ecological and social crises if we do not analyze them as two facets of the same disaster. This disaster derives from a system piloted by a dominant social stratum that today has no drive but greed, no ideal but conservatism, no dream but technology. This predatory oligarchy is the principal agent of the global crisis," writes Kempf. "The present form of capitalism," he adds in an interview, "has lost its former historic ends, that is to say the creation of wealth and innovation, because it has become a financial capitalism, disparaged even by capitalist economists. This capitalism, which destroys jobs by rationalizations, new technologies and globalizations, overall and everywhere increases the disparities between rich and poor within each country and between different countries," the journalist observes.

…This oligarchy he targets is not satisfied with blindly consuming and wasting the planet's material resources with its big cars, its airplane trips, its unbridled consumption of living products, its uselessly vast houses, its unrestrained energy wastage. It has also, adds Hervé Kempf, spawned a model of hyper-consumption that the lower and especially the middle classes now attempt to imitate, just as developing countries try to imitate Western countries - even though, whether instinctively or rationally, everyone clearly knows that "this ideology of waste" and its drain on planetary resources will inevitably come to an abrupt end. …

… Although he does not address the impact of unchecked [human population growth] on the decline of the planet's "biological services" in his essay, Hervé Kempf immediately acknowledges that this factor certainly has an impact that is greater overall than any hyper-consumption by this oligarchy, composed of several hundred thousand millionaires and billionaires who control the bulk of income and of financial capital. However, he explains, it's this oligarchy that creates an unsustainable model for the planet, the indirect impact of which on other social groups exceeds its direct consumption. "And," he says dryly, "not all humans have the same impact on the planet at birth: a Westerner carries more weight in the planet's fate than a baby from Niger or from India."

It's to put an end to this ostentatious consumption that he advocates radical control of wealth through "a ceiling on maximum salaries and on the accumulation of wealth," a sort of matching piece for the minimum wage, but on the upper side.

"Everyone," Kempf comments, "knows that China will never be able to reach a level of consumption per inhabitant comparable to that of the Americans, with two cars per family, three televisions, four computers and cell phones, a house three times too big for its inhabitants, which generates energy consumption that would be sufficient to the needs of ten, even twenty people on other continents." The environmental chronicler proposes that a reduction of its consumption be imposed on this oligarchy that has globalized poverty, so that it no longer feeds this unsustainable dream, which numbs the critical faculties of the entire planet to the point that it closes its eyes to the wall into which it is careening full speed ahead. …

… [K]nown for his rigor and level-headedness, [Kempf] nevertheless concludes: "It is still necessary for ecological concerns to be based on a radical political analysis of present relationships of domination. We will not be able to reduce global material consumption if the powerful are not brought down and if inequality is not combated. To the ecological principle so useful at the dawning of awareness - "Think globally, act locally" - we must add the principle that the present situation imposes: "Consume less, share better."

Ecologists, he adds, have not often conducted an inquiry into the "ecological misery" that parks the poor next to industrial neighborhoods, polluted and at risk, next to highways or noisy activities, in the most insalubrious houses and in sectors generally the least well-served by public services, including public transportation. It is wrong, he says, to act as though the economic system must grow more to bring these people out of poverty or to allow more poor people to attain greater wealth. The economic system works in the other direction, by monopolizing wealth and power at the expense of those who have the least, and of the middle classes that dream - ever more vainly - of hoisting themselves into the cocoon of the present financial oligarchy, Kempf maintains.

That's why, he says, we must "bring down the rich" rather than pull up the poor, in order to begin to respect the thresholds of irreversible deterioration of the planet's resources.

He takes aim, moreover, at the concept of sustainable development and the alibi it now constitutes for governments and companies that use it to justify other drains on resources in the name of this new rationale that is supposedly harmless for the planet. Sustainable development, he writes, has become "a semantic weapon to remove the dirty word, 'ecology.' Moreover, is there any need to still develop France, Germany, or the United States? The concept has meaning, he concluded in an interview yesterday, but only in developing countries, because it can help them to avoid a development as brutal and lawless as the one we have effected in the West. But in the West, he says, the first of our environmental responsibilities "consists of reducing our consumption of material goods" to attain a level of well-being based rather on values, knowledge, in sum on immaterial, but nonetheless very real, riches.

See also: How the Rich Are Destroying the Planet: A Review by Leslie Thatcher, Truthout.org, 03/15/07Cross-posted at Economic Dreams - Nightmares

Global Climate Change Fixes Prove Politically Vexing

(via Naked Capitalism, Yves Smith, 4/18/07)

Gideon Rachman, in "Climate change is not a global crisis — that is the problem," works through the implications of the fact that global warming will create winners and losers. He discusses first order effects – the benefits of warmer weather in Russia, and higher sea levels for Asia — and some second order effects, such as mass migration and increased instability.

It is disheartening as it is to consider that the asymmetrical impact of global warming will lower the sense of urgency and shared sacrifice, particularly since I suspect the impact of climate change could well be worse than is now envisaged. The second IPCC report was negotiated, and China called for some of the findings to be watered down. Moreover, while the report did contemplate the effects of changed weather upon agriculture, it did not consider the effect on other creatures. We are already in the midst of one of the greatest loss of species in planetary history, and at a certain point, the entire ecosystem become precarious. And on a mundane level, I am also not certain enough allowance has been made for the impact of unstable weather patterns on the grain belts, and the resulting lower yield and increased cost of staples.

From Rachman:

Here is another inconvenient truth. Global warming is good news for parts of the world. This is truly awkward. A "planetary emergency" that affected everyone equally would be much easier to tackle. However, climate change that hurts some places but helps others opens the way for dangerous political conflicts.

The latest report from the Intergovernmental Panel on Climate Change, issued this month, confirms that global warming puts large parts of the world at risk from the biblical woes of famine, flood and disease. The places most at risk are those that are already poor — sub-Saharan Africa and parts of Asia.

But in northern Europe, agriculture will become more productive and the climate will improve. From a parochial British point of view, the latest IPCC report sounds like good news. It has taken off the table the single most threatening scenario — the paradoxical threat that "global warming" was going to make Britain much colder by shutting down the Gulf Stream, the ocean current that gives the UK a much warmer climate than its latitude implies. The latest thinking from IPCC scientists is that this is very unlikely to happen during the next century.

Global warming offers a positive bonanza for Russia. The legendary Russian winter gets more tolerable. As the permafrost retreats in Siberia new mineral resources are revealed — and huge new areas become available for settlement and cultivation.

In an irony that will infuriate environmentalists, oil companies are also likely to benefit from global warming. The US Geological Survey estimates that 25 per cent of the world’s known oil and gas reserves are in the Arctic Circle. As the ice melts, they become easier to exploit.

As a new paper in Environment and Urbanization, an academic journal, makes clear, three-quarters of the 634m people deemed to be most at risk from rising sea levels connected to global warming live in Asia.

Coastal cities in the developed world, such as New York and Los Angeles, may be at risk. But wealthy countries are best placed to adapt to the problem. Certainly the Dutch, who have long experience of keeping the sea at bay, are not panicking. They are simply planning to spend billions more on flood defences.

Of course, even countries that may benefit directly from global warming could suffer indirectly — as other parts of the world descend into chaos. Britain is not an island (well, technically, Britain is an island — but you know what I mean). Dealing with refugees and desperate immigrants will only get harder as life becomes tougher in Africa and the Asian subcontinent.

In fact, it is now dawning on the world's politicians that global warming could transform international relations — introducing a range of new issues and conflicts.

The most obvious problems are struggles over refugees and resources. Some argue that the Darfur conflict is partially caused by global warming, as settled farmers and nomadic herders fight over failing land. This sort of conflict could proliferate in the future.

Last month, a conference arranged by the US Army War College heard that: "Within a century, extreme drought will affect 30 per cent of the world, up from 3 per cent today."

Water shortages are a particular threat. They have long been an underlying source of conflict in the Middle East. But as India and China run short of water, their neighbours are worried that struggles may arise over the diversion of rivers and the building of dams.

The idea that the Chinese are oblivious to the threat of global warming is untrue, as I discovered on a recent trip to Beijing. Officials were openly concerned that the Yangtze and Yellow rivers were at their lowest levels for years. Much of the problem is to do with irrigation and industrial use. But the Chinese believe that global warming is also contributing to water shortages because of its effect on rainfall and the glaciers that feed into Chinese rivers.

The government in Beijing faces a dilemma. Terrified of social unrest, it is reluctant to do anything that might slow economic growth — such as stopping the building of coal-fired power stations. Yet, water shortages are already causing social unrest in the countryside and the water table is falling fast in Beijing. One western analyst based in China speculates that the next political upheaval there could come "when people in Beijing turn on their taps in 2009 and find there is no water coming out".

Global warming will not just provoke conflicts over scarcity. It may also cause struggles over the emergence of new resources — in particular, the oil and gas that lies underneath the Arctic. Outstanding territorial disputes between Canada and the US, between Russia and Norway, and between Denmark and Russia have taken on a new urgency in recent years, as these countries develop a new interest in hitherto unpromising stretches of ice.

Struggles over territory and borders are, at least, familiar ground for politicians and diplomats. But the new diplomatic world will increasingly be dominated by debates over the environment and international regimes for combating climate change.

The argument over global warming could quickly turn into the latest and bitterest struggle between the traditional industrialised countries and the developing world.

Any successor to the Bush administration is likely to be much more concerned about global action on climate change. And in 2009, just as a new administration settles down in Washington, China is likely to surpass the US as the world’s leading source of carbon dioxide emissions.

Although rich northern countries are best placed to cope with global warming, domestic public opinion means they are also likely to be the countries pushing hardest for new international regulations to tackle carbon dioxide emissions. In the US and Europe, climate change is becoming a new issue to berate China about — merging with protectionist concerns about exports from Chinese companies that practise "environmental dumping".

But the Chinese will not lack allies in any struggle over who bears the costs of global warming. The Russians — with an economy based on fossil fuels, and a society that benefits from a warmer climate — may well stand with them. So could India and much of the developing world. Global warming presents a formidable environmental and scientific challenge. The political consequences may prove just as vexing.

Willem Buiter's Doubts on Continuing China/India's Meteoric Rise

After airing his positive Moring Coffee spin on China and India's remarkable growth, Brad DeLong highlights Willem Buiter's pessimism re: China and India's recent stellar rise. Buiter identifies financial "credit boom" risks, political risks, and most importantly environmental risks going forward. In follow-up commentary, DeLong adds a fourth, intertwined with Buiter's first: "The People's Bank of China is acting like the world's most enormous hedge fund in reverse."

Willem Buiter
[comment following Ft.Com Economists' forum post, 3/20/07]
Both India and China are in the terminal stages of a credit boom…. If the monetary and fiscal authorities act in time (they appear to be well behind the curve in both countries) and if they have the right instruments and the political will and freedom to use them (doubtful in both countries) the credit boom can end with a whimper. A hard landing seems more likely, however.

Second, a domestic political question mark… political risk to growth is seriously under-priced by the domestic and global communities of investors. In China economic liberalisation is proceeding side by side with continued political repression through the monopoly on political power of the Communist Party…. The sustainability of such a social-political-economic configuration has never been tested. India has had an open and representative form of government for sixty years. I believe this to be an important socio-political safety valve….

Third and probably most importantly, an environmental question mark. Environmental supply-side constraints on growth in Chindia… invalidates the growth accounting exercise by Bosworth and Collins, reported by Martin [Wolf]…. [O]utput is seriously mis-measured and a key input - the services yielded by the stock of environmental capital - is ignored completely. For Chindia, this omission matters even in the medium run…. It is the local (national) natural resources of clean fresh water and fertile land (some would add clean air as well) that are not only important domestic 'consumer durables' but also key inputs into the production of the goods and services that are captured by conventionally measured GDP indices…. The water constraint is likely to be the first one to become binding in both China and India, certainly within 10 years. It will impair even the production of those goods and services included in conventional GDP measures….

Chindia urgently needs to re-orients its growth policies towards environmental sustainability. Pricing all water and power use (including agricultural) at long-run marginal social cost would be a good start. Without such a radical re-orientation, the 21st century may well become the century of China and India for a very different reason from the one prophesied by the current uncritical Chindia cheerleaders…

Brad DeLong, again in follow-up comments to the FT.com Economists' Forum post, says:

Brad DeLong
I would add a fourth worry, in addition to the environmental, infrastructure, education, and political legitimacy worries that have already been aired. The People's Bank of China is acting like the world's most enormous hedge fund in reverse. Unless there is significant inflation in China or a rapid reversal of global imbalances, the PBoC is likely to have to write off the largest amount of capital of any institution anywhere, anytime, anyhow—with either China's savers or China's taxpayers holding the bag. The political consequences of that may be a further important source of risk.

Finally, a DeLong reader points to Bill McKibben's recent Mother Jones commentary, Reversal of Fortune, and highlights:

Bill McKibben
… If we do try to keep going, with the entire world aiming for an economy structured like America's, it won't be just oil that we'll run short of. Here are the numbers we have to contend with: Given current rates of growth in the Chinese economy, the 1.3 billion residents of that nation alone will, by 2031, be about as rich as we are. If they then eat meat, milk, and eggs at the rate that we do, calculates ecostatistician Lester Brown, they will consume 1,352 million tons of grain each year—equal to two-thirds of the world's entire 2004 grain harvest. They will use 99 million barrels of oil a day, 15 million more than the entire world consumes at present. They will use more steel than all the West combined, double the world's production of paper, and drive 1.1 billion cars—1.5 times as many as the current world total. And that's just China; by then, India will have a bigger population, and its economy is growing almost as fast. And then there's the rest of the world.

Trying to meet that kind of demand will stress the earth past its breaking point in an almost endless number of ways ….

So many environmental concerns, so little time!

[Posted from Economic Dreams-Nightmares]

Kenneth Arrow: Beyond Impossibility

Over at Natural Capital Rob Metcalfe points to a wide-ranging interview with Kenneth Arrow ([PDF], 2005), noting that "the future should be bright for env econ as it attempts to incorporate rational models with behavioural models and neuroeconomics." Juan Dubra introduces the interview: "Arrow argues that the biggest failures of economic theory are: our failure to explain the business cycle; the missing explanations for the size of fluctuations of prices; our failure to explain the causes of growth and the spread of innovation. He then discusses several … alternatives to the rational expectations paradigm."

Although the interview is only tangentially related to environmental economics, I believe it important since env econ practitioners take their lead from practitioners in other fields of economics (and ecology, and many other of the "sciences", natural, biological, and social). Remember that it was Arrow who caused economics practitioners much soul-searching consternation with his Impossibility Theorem.

As I reflect on the interview, I find it odd that Arrow does not acknowledge the work of Hyman Minsky and other Post Keynesians who I argue (frequently at Economic Dreams … Nightmares) have dealt with (continue to deal with) all of Arrow's stated concerns in great detail. (Minsky overview here, or in-depth: The Economic Contributions of Hyman Minsky: Varieties of Capitalism and Institutional Reform.)

Oversights or deliberate omissions aside, the interview proves interesting as history and in suggesting paths forward. Arrow does point to the work of his under-study Brian Arthur in complexity theory (which I've followed for years), and to the work of Daniel Kahneman and Amos Tversky on inter-relating decision theory and psychology, here for example, and questioning "expected utiltity theory", here for example.

Finally, does anyone know if Arrow and Minsky had a falling out? Or are there other explanations for Arrow's seeming oversight re: Minsky and others who are (and have been) dealing with Arrow's "biggest failures of economic theory"?

Is Economics Still Relevant?

The question was addressed in Policy Options in April 1999, in Is Economics Still Relevant? What has become of the discussion since? Does anyone know who has picked up this ball since, other than those who belong to the Post-Autistic Economics Network. Here are abstracts and downloads:

• Mark Blaug, "Ugly Currents in Modern Economics"
  
• Lester C. Thurow, "The Strengths and Weaknesses of Economists"
  
• Robin Boadway, "Economic Theory Dictates a Rethinking of Policy"
  
• Daniel M. Hausman and Michael S. McPherson, "Beware of Economists Bearing Advice"
  
• Thomas Mayer, "On the Usefulness of Economics"
  
• Mark Setterfield, "Are Academic Economists Concerned About Public Policy?"
  
• Jack Mintz, "Economists Are Relevant And Could Be More So"
  
• Jon Mulberg, "Economics: Who Needs It?"
  
• David Longworth , "Economics at the Central Bank"
  
• David Mayes, "The New Zealand ‘Experiment’: Using Economic Theory to Drive Policy"
  
• Alex McLeod, "Government Deficits and Debt: Their Cause and Cure"
  
• C. Lloyd Brown-John, "Self-Determination and Separation"

Economists as Story Tellers

Phillip Ball's Financial Times' critique of economics, titled Baroque Fantasies of a Peculiar Science caused quite a stir recently in the economics blogs (particularly here and here). But last week the bickering subsided with Dave Altig (macroblog) and Phillip Ball seeming to have reached an accord.. At one point Altig said, "If you want, call economics an attempt to construct coherent stories about social phenomenon..." Sounds about right to me. We economists are indeed story tellers. Following this discussion, it seems clear that economists need to be much more open and honest about our assumptions and the linkages, such as they are and often are not to the real world of policy and action. No argument from me on that score. I've been arguing similarly for years.

For more critique, see Steve Cohn's August 2002 Telling Other Stories: Heterodox Critiques of Neoclassical Micro Principles Texts [PDF] wherein Cohn attacks the "'rhetoric' of neoclassical theory, …critiquing many of the stories told, the metaphors used, the analogies drawn, and the framing language deployed"

In addition, there have been many book-form critiques arguing that economists, particularly neoclassical economists have over-driven their headlights in much the same way that Bell argues. Here are six of my favorites (arranged by date of publication):

• J. de V. Graaff. Theoretical Welfare Economics. 1957
  

• Guy Routh. The Origin of Economic Ideas. 1975
  
• Mark Blaug. The Methodology of Economics: Or How Economists Explain. 1980
  
• Robert L. Heilbroner. Behind the Veil of Economics: Essays in the Worldly Philosophy. 1988
  
• Mark Sagoff. The Economy of the Earth: Philosophy, Law and the Environment. 1988
  
• Andrew Bard Schmookler. The Illusion of Choice: How the Market Economy Controls Our Destiny. 1993

Economic Fundamentalism: Too Many False Prophets

Fred Argy provides a refreshingly different point of view on the debate about economics and science. Argy argues that maybe all of us – whether or not economists – ought to be aiming attacks primarily at economic fundamentalism:

[Beware of Economic Fundamentalism, Australian Review of Public Affairs, Mar. 31,2003] … There are too many false prophets in our profession—the kind who like to assert policy opinions in black-and-white terms, such as 'there is only one right way' and 'no other way will do'. This is what I like to call 'economic fundamentalism'. And I believe it is wrong on all counts.

For one thing, economics does not lend itself to doctrinaire policy assertions. The technical complexities are too great, the behavioural reaction of human beings too changeable and unpredictable, and the market subject to many imperfections. … [Many economic] questions do not lend themselves to definitive answers. The honest economist can make an 'on balance' judgment, but should also acknowledge the uncertainties and the merits of alternative positions.

Another reason why doctrinaire policy positions are unwarranted is that much of the day-to-day policy debate is not simply about economic choices. It is about normative values—the appropriate weight society should give to conflicting goals, such as freedom of choice, individual responsibility and self-reliance, equality of opportunity (what Australians call 'a fair go for all'), protection of the environment, and a sense of community.

Frankly, we economists have no special wisdom to offer on what should be the right balance between such goals. We can point to the economic costs and benefits of each option, but to go further and assert that one option is indisputably superior to all others is presumptuous. For example, will wage deregulation and welfare cuts have a big or small impact on employment, and how much pain will it inflict on low wage earners? Can the same employment outcomes be achieved through labour market programs such as wage and training subsidies, without the regressive effect on low wage earners? Again, will tax cuts have a more positive impact on community wellbeing than an increase in government spending? These are questions that are hard for economists to resolve because the alternatives being offered have very different distributional effects.

True professionalism requires economists to spell out the distributional as well as economic effects of each policy option, and then leave it to politicians to choose between them in the light of community preferences. …

One major risk of economic fundamentalism is that, like other forms of fundamentalism, it often breeds policy extremism. …

Another risk … is that it tends to widen the already large gulf between economists and the wider community. It encourages our critics to say that we are so obsessed with efficient markets that we have become insensitive to social and environmental concerns. …

When economists seek market-based solutions, they are discussing better means to given ends. Economic liberalism is consistent with a wide spectrum of ethical and philosophical values, and a wide range of distributional outcomes. So we need not be apologetic about our faith in competitive markets as instruments of allocation (where these are sustainable and do not involve disproportionate externalities). It is our critics who have got it wrong. Unfortunately, when some of our fellow economists seek to change society while masquerading as market economists, they give our profession a bad name.

To sum up, we have a proud and honourable profession. We need to defend it against external critics (on both the Left and Right) who attack our devotion to competitive markets without really understanding what we are on about. But equally, we should be vigilant in exposing the small but vocal band of extremists within our profession who take doctrinaire economic positions or, worse still, who push their own values under the false guise of economics. This is particularly evident in the current policy debate on labour market deregulation and welfare reform. The famous British economist Joan Robinson saw the danger clearly. She said that 'the purpose of studying economics is to learn how to avoid being deceived by other economists'.

So my advice to budding economic policy advisers is this: by all means be decisive in your day to day work, but when discussing policy don’t be afraid to be called a two-handed economist—'on the one hand this, and on the other hand that'. Wear it as a badge of honour.

Two questions: 1. How does one distinguish between "economic fundamentalists" and other practicing economists? We economists all tend to throw stones at others who are ideologically and methodologically different from us. Perhaps Argy is right is suggesting that we label as fundamentalists those "who like to assert policy opinions in black-and-white terms, such as 'there is only one right way' and 'no other way will do'."

2. How does one practice economics w/o being libeled as a fundamentalist? Here again Argy gives some useful clues when he says "[Many economic] questions do not lend themselves to definitive answers. The honest economist can make an 'on balance' judgment, but should also acknowledge the uncertainties and the merits of alternative positions."

One place where I tend to depart from Argy is his statement that "We can point to the economic costs and benefits of each option,". I agree in principle, but argue that we need to be very, very careful in our adding up costs and benefits of policy proposals. There are just too many things that prove too uncertain or too "contested" to be added up in any closed form way. Still I strongly agree with the rest of Argy's sentence, "but to go further and assert that one option is indisputably superior to all others is presumptuous."

Is the problem, in the main, that we have too many economic fundamentalists, "too many false prophets" in our profession? Do we need to get much better at self-policing?

As to "ecology fundamentalists," we will leave that topic for another day...

Dave Altig on Phillip Ball's Rant on Neoclassical Economics

Dave Atlig (macroblog) has a good rejoinder to Phillip Ball's Criticism of Neoclassical Economic Theory. Here is a snip:

…It is true that neoclassical economists tend to be the methodological children of Milton Friedman, heirs to a positivist tradition that directly connects explanation and predictability. But predictability in this sense is conditional: If X occurs then, all else equal, Y will follow. As a matter of logic, large forecast errors may only prove that the arrival of X is especially uncertain, and that economists are not clairvoyant (a trait that I think is shared with physicists and other human beings).

To be fair, if Y equals a stock market crash, I cannot really tell you what X equals. I am unaware of any serious economist who claims they can. Even those economists who express knowledge of a "bubble" in some asset market or another shy from taking definitive stands on when and how the bubble will burst.

I do know this, however: Economists have devoted a lot of energy to thinking about the lessons delivered by the Great Depression. At least part of the conventional wisdom formed from that thinking is that it is a very bad idea to restrain liquidity when liquidity is most desired. For an example of that wisdom in practice, I refer to you to the actions of the Federal Reserve in the aftermath of the 1987 market crash in the United States. I'll stick my neck out and claim that the world was more pleasant as a result of putting that lesson into action.

[Ball]…The usual defence is that you have to start somewhere. But mainstream economists no longer consider their core theory to be a "start". The tenets are so firmly embedded that ... it is ... rigid dogma. To challenge these ideas is to invite blank stares of incomprehension – you might as well be telling a physicist that gravity does not exist.

That is disturbing because these things matter. Neoclassical idiocies persuaded many economists that market forces would create a robust post-Soviet economy in Russia (corrupt gangster economies do not exist in neoclassical theory)...

Economists accept -- insist, actually -- that institutions matter, and nobody would argue that market forces alone can create a "robust" economy absent well-defined property rights, functioning legal systems, and the like. If you doubt that, check out the latest John Bates Clark award.

[Ball]...Neoclassical economics asserts two things. First, in a free market, competition establishes a price equilibrium that is perfectly efficient: demand equals supply and no resources are squandered. Second, in equilibrium no one can be made better off without making someone else worse off.

Wrong. Mr. Ball is thinking of the concept of Pareto efficiency, which does indeed describe a situation in which "no one can be made better off without making someone else worse off." But there is no presumption among economists that free markets and competition will deliver such an outcome. Any time an economist speaks of asymmetric information (conditions in which one person knows something another does not), externalities (things like pollution that is not paid for by the polluters), inflexible prices or wages, or taxes on any sort of economic activity, he or she is starting from the presumption that the free-market outcome is not efficient. In fact, any time an economist speaks it is quite likely they are contemplating a world in which free-market outcomes are not efficient. To not recognize this is demonstrate a startling ignorance of what economics is actually about. …

There is more.. Go to to Dave's post and read on….
And if you are really a glutton for punishment, read Mark Thoma's post and as of now 110 follow-up comments that got things rolling.

Global Warming Problem Political, Not Economic

"...It is about politics—the politics of getting America to lead a global effort to mitigate the effects of climate change....

The Economist, Global Warming, Economic Cooling [10/30/06]: SIR NICHOLAS STERN, the head of the British Government Economic Service, has produced the world’s first big report on the economics of climate change. But his 700-page effort, although stuffed with figures, is not really about economics. It is about politics—the politics of getting America to lead a global effort to mitigate the effects of climate change.

The purpose of Sir Nicholas’s report—commissioned by Tony Blair—is to deal with the argument of people who accept that climate change is happening, but who say that trying to do anything about it would be a waste of money. This argument is heard occasionally in Europe and frequently in America, where, for added potency, it is combined with the notion that European attempts to tax carbon are part of a conspiracy by socialists determined to undermine the American way of life.

Sir Nicholas’s argument is that, far from undermining the American way of life, attempts to mitigate climate change may help preserve it. He argues this by setting the costs of allowing climate change to happen against the costs of mitigating climate change.

Previous estimates of the costs of climate change—as a result of more hurricanes, more floods and rising sea levels, for instance—have been somewhere between nothing and 2% of global GDP. But Sir Nicholas says those figures were wrong, for two reasons. First, the science has changed, and global warming seems to be happening faster than was previously believed. Second, those estimates have looked only at the likeliest outcomes from climate change, not at the outlying catastrophic possibilities. As a result, Sir Nicholas maintains that if greenhouse gas emissions go on increasing at their present rate, global output is likely to be between 5% and 20% lower over the next two centuries than it otherwise would have been.

Compared with those figures, the costs of mitigating climate change look quite moderate. Sir Nicholas reckons that stabilising concentrations of greenhouse gas equivalent at 550 parts per million (ppm) is a reasonable objective (current levels are at around 380ppm). He reckons that, partly because of falling alternative energy costs, the world could achieve that at a moderate cost. Global output is likely to be around 1% lower by 2050 than it otherwise would have been.

The choice does not look like a difficult one: costs of 5%-20% of global GDP versus costs of 1% of global GDP. Unfortunately, that’s not the difficult bit. The difficult bit is the politics. Climate change is an exceedingly hard issue. It is uncertain: nobody really knows how much it is going to cost. It crosses generations: this generation will have to bear some of the costs while the benefits will accrue to future generations. It crosses boundaries: no one country can solve the problem.

But there is one country towards which Sir Nicholas gestures when he writes of the need for “demonstrating leadership” and “working to build trust”, without which all efforts to deal with the problem will fail: America. (China may well become a bigger polluter than America, but persuading it to do something about climate change will be near impossible if America does not act first). Sir Nicholas does not explain how to solve the difficulty of getting America on board. But if he succeeds in persuading policymakers that the American way of life is better preserved by dealing with climate change than by ignoring it, he himself might be part of the solution.

New Economist adds: The Stern Review's earlier discussion paper, What is the Economics of Climate Change? (PDF) ... argues climate change is a serious and urgent problem, global in its cause and consequences. Current actions are not enough "if we are to stabilise greenhouse gases at any acceptable level". The "economic challenges are complex", and will require a long-term international collaboration to tackle them.

UPDATE: Dissenters are beginning to weigh in:

Neoclassical Theory under Fire from the Sciences

There is a very good discussion right now on Mark Thoma's Economists View about neoclassical and other economics and linkages to science, theology, ideology, etc. I'll update this post with a bit more in a few hours, but right now I'm just intrigued with the excellent commentary being generated. {Update: I plucked a few comments from Mark's discussion and appended them in the extended portion of this message}

This is Philip Ball, "consultant editor of Nature and the author of Critical Mass," with a criticism of neoclassical theory: Baroque fantasies of a most peculiar science, by Philip Ball, Commentary, Financial Times (free): It is easy to mock economic theory. Any fool can see that the world of neoclassical economics, which dominates the academic field today, is a gross caricature in which every trader or company acts in the same self-interested way – rational, cool, omniscient. The theory has not foreseen a single stock market crash and has evidently failed to make the world any fairer or more pleasant.

The usual defence is that you have to start somewhere. But mainstream economists no longer consider their core theory to be a “start”. The tenets are so firmly embedded that ... it is ... rigid dogma. To challenge these ideas is to invite blank stares of incomprehension – you might as well be telling a physicist that gravity does not exist.

That is disturbing because these things matter. Neoclassical idiocies persuaded many economists that market forces would create a robust post-Soviet economy in Russia (corrupt gangster economies do not exist in neoclassical theory). Neoclassical ideas ... may determine ... how we run our schools, hospitals and welfare system. If mainstream economic theory is fundamentally flawed, we are no better than doctors diagnosing with astrology.

Neoclassical economics asserts two things. First, in a free market, competition establishes a price equilibrium that is perfectly efficient: demand equals supply and no resources are squandered. Second, in equilibrium no one can be made better off without making someone else worse off.

The conclusions are a snug fit with rightwing convictions. So it is tempting to infer that the dominance of neoclassical theory has political origins. But ... the truth goes deeper. Economics arose in the 18th century in a climate of Newtonian mechanistic science, with its belief in forces in balance. And the foundations of neoclassical theory were laid when scientists were exploring the notion of thermodynamic equilibrium. Economics borrowed wrong ideas from physics, and is now reluctant to give them up.

This error does not make neoclassical economic theory simple. Far from it. It is one of the most mathematically complicated subjects among the “sciences”, as difficult as quantum physics. That is part of the problem: it is such an elaborate contrivance that there is too much at stake to abandon it.

It is almost impossible to talk about economics today without endorsing its myths. Take the business cycle: there is no business cycle in any meaningful sense. In every other scientific discipline, a cycle is something that repeats periodically. Yet there is no absolute evidence for periodicity in economic fluctuations. Prices sometimes rise and sometimes fall. That is not a cycle; it is noise. Yet talk of cycles has led economists to hallucinate all kinds of fictitious oscillations in economic markets. Meanwhile, the Nobel-winning neoclassical theory of the so-called business cycle “explains” it by blaming events outside the market. This salvages the precious idea of equilibrium, and thus of market efficiency. Analysts talk of market “corrections”, as though there is some ideal state that it is trying to attain. But in reality the market is intrinsically prone to leap and lurch.

One can go through economic theory systematically demolishing all the cherished principles that students learn... [I]t is abundantly clear that herding – irrational, copycat buying and selling – provokes market fluctuations.

There are ways of dealing with the variety and irrationality of real agents in economic theory. But not in mainstream economics journals, because the models defy neoclassical assumptions.

There is no other “science” in such a peculiar state. A demonstrably false conceptual core is sustained by inertia alone. This core, “the Citadel”, remains impregnable while its adherents fashion an increasingly baroque fantasy. As Alan Kirman, a progressive economist, said: “No amount of attention to the walls will prevent the Citadel from being empty.” ...

Samples from a New Blog: Transdisciplanary Journeys

Last night via email Roderic Gill, who directs the Centre for Ecological Economics and Water Policy Research (CEEWPR), introduced me to the new Transdisciplinary Journeys Blog. Gill suggested that our blog journeys seemed to be on parallel paths. After looking at their introductory posts, I agree. Here's a sampler. I also linked them up on our sidebar. Nice to see this thinking getting more air time.

Transdisciplinary Thinking, posted by Roderic Gill

In my view, there is a general tendency in the ecological economics community to spend little time with its core and underlying philosophy of transdisciplinarianism. To me, the transdisciplinary focus is at the heart and root of ecological economics. Little attention though, seems to be devoted to really coming to grips with what the word really means and implies. It is a very powerful concept. And a major challenge for application and procedure. In essence, the ecological economics transdisciplinary focus implies a synergistic alliance between and across conventional disciplinary boundaries. Transdisciplinary is more fundamentally participative than multi-disciplinary (where the agenda for problem definition and the management of cooperation still resides with a disciplinary instigator). The transdisciplinary approach implies cooperation from beginning to end; cooperation at the problem or issue interpretation stage through to the cooperative implementation of results. …

Sustainability and Resilience, posted by Leo Dutra

The goal of sustainable development is to create and maintain ‘prosperous’ social, economic, and ecological systems. These systems are intimately linked: humanity depends on services of ecosystems for its wealth and security and humans can transform ecosystems into more or less desirable conditions. Ecosystem services include provision of clean water and air, food production, fuel, and others. Yet human action can render ecosystems unable to provide these services, with consequences for human livelihoods, vulnerability, and security. Such negative shifts represent loss of resilience.

In operationalising resilience, managing for sustainability in socio-economic systems means not pushing the system to its limits but maintaining diversity and variability, leaving some slack and flexibility, and not trying to optimise some parts of the system but maintaining redundancy. It also means learning how to enhance adaptability, and understanding when and where it is possible to intervene in management. These ‘soft’ management approaches are necessary because ‘hard’ management approaches involving quantitative targets for resource production often do not work. Linear models on which ‘hard’ management depends tend to be incomplete or even misleading in the management of the ecosystems of the world. Equilibrium-based predictive models do not perform well with complex social-ecological systems.

This particular view of resilience is in accordance with the Ecological Economics thinking on sustainability. Sustainable futures are inherently unpredictable and reinforce the idea (proposed by CEEWPR researchers Tony Meppem and Roderic Gill) that sustainability cannot be planned in a rational fashion. In the absence of a linear, mechanical universe that would have permitted simple, rational measures, the best bet for sustainability involves capability for self-organisation and capacity for learning and adaptation.

More resilient social-ecological systems are able to absorb larger shocks without changing in fundamental ways. When massive transformation is inevitable, resilient systems contain the components needed for renewal and reorganisation; they can cope with, adapt to, or reorganise without sacrificing the provision of ecosystem services. Resilience is often associated with diversity—of species, of human opportunity, and of economic options—that maintains and encourages both adaptation and learning.

Social-ecological systems are constantly changing and the design of sustainable futures should encompass this changing nature. Resilience emphasises systems including ‘humans-in-nature’, describing, therefore, a more holistic approach toward sustainability.

Resilience is a useful sub theme of sustainability in that it focuses on bringing together thinking about human systems (short time horizons) with long-term outcomes (ecological systems such as coral reefs). Management that builds resilience can sustain social-ecological systems in the face of surprise, unpredictability, and complexity. Resilience-building management is flexible and open to learning. It attends to slowly changing, fundamental variables that create memory, legacy, diversity, and the capacity to innovate in both social and ecological components of the system. It also conserves and nurtures the diverse elements that are necessary to reorganise and adapt to novel, unexpected, and transformative circumstances. Thus, it increases the range of surprises with which a socio-economic-ecological system can cope.

The concept of resilience shifts policies from those that aspire to control change in systems assumed to be stable, to managing the capacity of social-ecological systems to cope with, adapt to, and shape change. Resilience emphasises adaptability of systems and is thus a useful focus for sustainability. Impacts on ecological resilience will affect socio-cultural and economic resilience as well. The decline of cod fisheries in Newfoundland and Labrador (North America) is an example of the resilience links among ‘panarchical’ cycles of socio-economical and ecological variables. The elimination of the cod stock in the North Atlantic led to the collapse of the economy of the region. After 600 years of profitable fishing in that region, local fishermen nowadays rely on government help for livelihood. The traditions around cod fisheries and the techniques utilised by traditional fishermen may be lost when (and if) the cod stock recover.

Resilience is, therefore, not only an issue of sustainability and options for development, in the present and future, but also an issue of environmental, social and economic security.

Building social-ecological resilience requires understanding of ecosystems that incorporate the knowledge of local users. Thus, the ecological ignorance of some contemporary societies undermines resilience. Technological developments and economic activities based on the perception of decoupled social and ecological systems further contribute to the erosion of resilience. This can be counteracted by understanding the complex connections between people and nature, which create opportunity for technological innovations and economic policies aimed at building resilience.

Two useful tools for resilience-building in social-ecological systems are: (i) structured scenarios and; (ii) active adaptive management. People use scenarios to envision alternative futures and the pathways by which they might be reached. Active adaptive management views policy as a set of experiments designed to reveal processes that build or sustain resilience. It requires, and facilitates, a social context with flexible and open institutions and multi-level governance systems that allow for learning and increase adaptive capacity without foreclosing future development options.

Managing for resilience embraces sustainability outcomes in relation to the social-ecological system. A changing, uncertain world in transformation demands action to build the resilience of the social-ecological systems, which embrace all of humanity.

New Online Journal: International Journal of Transdisciplinary Research!

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International Journal of Transdisciplinary Research! A journal in favor of an economic paradigm shift and for research on society, economy, and ecology.

Current Issue: Volume 1, Issue 1

1. Transdisciplinary Research: Moving Forward [PDF]
   John M. Polimeni
   
2. The Need for a New Biophysical-based Paradigm in Economics for the Second Half of the Age of Oil [PDF]
   Charles A. Hall and Kent A. Klitgaard
   
3. Production Theory and Peak Oil: Collapse or Sustainability? [PDF]
   John M. Gowdy
   
4. Knowledge Representation and Mediation for Transdisciplinary Frameworks: Tools to Inform Debates, Dialogues & Deliberations [PDF]
   Ângela Guimarães Pereira and Silvio Funtowicz
   
5. Can Biofuels Replace Fossil Energy Fuels? A Multi-scale Integrated Analysis Based on the Concept of Societal and Ecosystem Metabolism: Part 1 [PDF]
   Mario Giampietro, Kozo Mayumi, and Jesus Ramos-Martin
   
6. Systems Thinking and Common Ground [PDF]
   John Peet
   
7. Economic Efficiency in Fisheries and Aquaculture [PDF]
   Paul Molyneaux

ICAPE: alliance of radicals (wide-awake economists?)

Ever heard of ICAPE? I had not until I saw this announcement from post-autistic economics review for a next-year conference in my part of the world:

Announcement
The International Confederation of Associations for Pluralism in Economics (ICAPE)
announces its second international conference:
Economic Pluralism for the 21st Century
June 1-3, 2007
University of Utah (Salt Lake City, Utah, USA)

In the second half of the 20th century, neoclassical economics and its derivatives came to dominate economic thinking, teaching and policymaking. Humanity is increasingly feeling the consequences of this blinkered vision: the ever-widening gap between the very rich and all the rest, and between developed and underdeveloped nations; globalization without global coordination for the common good; and economically induced climate change, with the mid-century prospect of an Earth unable to support even current levels of human population. Meta-externalities from economic systems are draining the resources on which they depend, from families and other institutions that educate and socialize human beings, to water, air, soil, and the diversity of species.

In a positive vein, economics in the 21st century has already taken a decidedly pluralist turn, spurred in part by the struggles of economists – mainstream and heterodox – to increase the relevance of economic theory, policy, and education in a changing and challenged world where no single theoretical tradition or institutional structure can reasonably claim to hold “the key” to human betterment.

ICAPE and the organizers of "Economic Pluralism for the 21st Century" invite proposals for papers that discuss or demonstrate the value of economic pluralism in any of its domains: economic theory and philosophy, economic institutions and policies, or economic education.

Panels will be organized around thematic topics, with an eye to encouraging dialogue among authors whose papers address similar issues from different points of view. In this fashion, we hope to promote critical engagement and mutual learning among conference participants.

Details are available here.

Update July 10:

Following a trackback on this post I was reminded that it proves important to note that there are many economists from many different ideologies in economics who are indeed "wide-awake" to the limits of thier ideology/methodology as well as to the complexities and political wickedness embedded in the problems of the world.

But there are also many economists in both mainstream and non-mainstream fields who, like many practitioners from all fields, remain pretty much zombie-like in their too-narrow focus, too-easily-misinterpreted prognostications. We who align ourselves with the more radical (or more rational, depending on one's perspective) fields need to acknowledge contributions from whence they come and not get too wrapped up in of our criticism of other disciplines.For those wanting to know more about the "associate groups" in ICAPE, read on:

The Three Lenses of Threat Perception

Thanks to Jeff McIntire-Strasburg of Sustainablog for referring us to this LA Times op-ed piece that offers some insight into how people tend to evaluate the extent to which something like terrorism or global warming is a threat.  According to psychologist Daniel Gilbert:

NO ONE seems to care about the upcoming attack on the World Trade Center site.  Why?  Because it won't involve villains with box cutters.  Instead, it will involve melting ice sheets that swell the oceans and turn that particular block of lower Manhattan into an aquarium.

The odds of this happening in the next few decades are better than the odds that a disgruntled Saudi will sneak onto an airplane and detonate a shoe bomb.  And yet our government will spend billions of dollars this year to prevent global terrorism and … well, essentially nothing to prevent global warming.

Why are we less worried about the more likely disaster?  Because the human brain evolved to respond to threats that have four features — features that terrorism has and that global warming lacks.

What, in Gilbert's estimation, are the four features of perceived threats? 

1. they are the product of human intention
2. they violate our moral sensibilities
3. they represent an immediate problem
4. they appear suddenly or grow rapidly

Inconvenient Truth

Last Thursday night, my wife Karen and I saw Al Gore's new movie, An Inconvenient Truth.  It is, in my opinion, a very clear, compelling,