It is time to stop quivering in our boots in pointless fear of the future and just roll up our sleeves and build it.
- Ray Pierrehumbert

Saturday, December 8, 2007

Economists Untested Claim to Oligarchy

The only way to a soft landing is down.

In a brief article on DeSmog by Emily Murgatroyd, a Cato Institute type, Jerry Taylor, is quoted as saying
scientists are in no position to intelligently guide public policy on climate change. Scientists can lay out scenarios, but it is up to economists to weigh the costs and benefits and many of them say the costs of cutting emissions are higher than the benefits.
Can we consider this claim, or is it somehow protected by a taboo? Is one a Marxist or even a Stalinist for pointing out that economists are not, themselves, necessarily, right about everything?

Climate science has been subject to a great deal of scrutiny, not all of it undeserved. I would be the last to claim that climate science is conducted impeccably and flawlessly. Though many of the problems are widely misconstrued, much of it indeed traces to motivational structures. At least we are constrained, though, by established physics.

Economists, meanwhile, claim to have the key to rationality. A claim in more desperate need of challenging I cannot imagine, yet on it goes, essentially unchallenged. Is infinite growth of some meaningful quantity possible in a finite space? No scientist is inclined to think so, but economists and their hypnotized victims habitually makes this claim without bothering to defend it with anything but "I'm, an economist and I say so", or perhaps more thoughtfully, "hey, it's worked until now".

You know, the gods of Easter Island smiled on its people "until now" for a long time, until they didn't.

The presumptions are so pervasive that great swaths of economic theory collapse in a singularity if a negative growth rate occurs. What, for instance, does a negative discount rate imply? Accordingly there is a presumption of growth the pervades everything. Even the Stern report, which is based on enough understanding of our circumstances as to see that unconstrained carbon emissions are to be avoided, has to torture economics a bit to come up with the result, and even so speaks of the consequences of failure in terms of "slowed growth".

Well, the cockroaches and jellyfish won't consider it a period of decline, I guess...

As for our species, we need a new economic theory.

Maybe what I'm saying would carry more weight if I formalized it a bit. How about this: everything economists say suffers from the bias of an implicit conditional. Two implicit conditionals in fact: economists provide advice presuming that growth is unlimited and that endless growth is desireable. They never bother to defend either condition on which their advice is based. (I think even the quantity which is "growing" is ill-defined.)

These conditionals were good approximations in the past. Once the finite nature of our world comes into play they become very bad approximations.

The whole growth thing becomes a toxic addiction. The only path to a soft landing is down; we in the overheated economies need to learn not just to cope with decline but to celebrate it. We need not just an ideology but a formal theory that can not only cope with reduced per capita impact but can target it.

I think the soft landing is still within our grasp. The longer we treat the people who call themselves economists as a priesthood above criticism rather than as a human subculture with serious dysfunctions, though, the bumpier the best landing we can achieve gets.

Climate change is just a symptom, though an increasingly salient one. The problem lies in our (humanity's) collective failure to consider what human decency means and to use that understanding to manage what money means. We don't have to listen to people who get that backwards.

Note: I submitted a somewhat clearer version of this to Grist. I'll let you know if/when it appears. Sunday evening: still not on Grist but here's a closely related article there by some other folks that I found very interesting.

Update 12/10: This is posted on Grist and is getting quite a few comments.

Update 12/11: "Tidal" offers us an immensely valuable link. (Thanks!) I am entirely enthusiastic about the contents of this talk by Josh Farley. He talks a bit too fast, which is a bit unpleasant, but that lets him get a lot in within a relatively short talk. I highly recommend it.


John Fleck said...

Michael -

I think your claim that economists "claim to have the key to rationality" does the community of economists a disservice. Taylor may want to imply or believe that, but the economists I've been reading lately seem to suffer no such hubris. Their claim seems more modest - that they've got a useful tool kit that might be applicable to the discussion if they could only sort out this thorny discount rate mess.

Zowish said...

Once again, you've nailed it. My only clarification: what we face is not so much the species' problem as it is this culture's: that tangle of stories, assumptions, and traditions informing our particular lifeway. It will be easier (relatively) to change the culture than our genetic makeup.


Phil said...

"Is infinite growth of some meaningful quantity possible in a finite space?"

errrm, do economists measure anything meaningful?

My take on the "economics" which knows nothing of economy is to slightly paraphrase a wise man from a couple of milennia in the past.

The concept of money is the root of all evil.

And our society's elevation of that concept to a level of importance far above all others is one huge tragedy.

Steve Bloom said...

I broadly agree with John, but I think there's a different answer if one just looks at the network of wingnut DC think tanks of which Cato is an example. That they have had a dominant role in setting U.S. ecomomic policy these last years is hard to argue against. And of course they strive mightily to make it seem as if they represent the reasonable mainstream of economic thought.

Michael Tobis said...

John, Steve, on one hand, there are reasonable people in even the most unreasonable of places. On the other hand, I don't find Stern's approach to the problem convincing.

If all we are worried about is a slight dampening of the growth rate over the next century, I would say to hell with treaties and obligations. As James Annan said (paraphrasing from memory) why should I care if people a hunderd years from now are only nine times as wealthy as we are today rather than ten?

No. The whole discipline needs to be examined from its roots. None of it looks much like science to me. I suspect it's all short-term heuristics being applied to long term problems. Whether this or that economist comes up with an answer that does or doesn't suit me isn;t the question I'm raising here.

The question I'm raising is whether their claim to being the final arbiter of costs and benefits makes any damned sense at all.

John Mashey said...

I agree somewhat with both of you, but I think the problem is mis-stated. I've read some of Jerry's work [in Sovacool & Brown, Energy an American Society - Thirteen Myths, HIGHLY recommended book and in some comments in DeSMogBlog], and I thought him more rational than most CATO stuff, not that I necessarily agree 100%.

I'd claim:

1) Science has to be done by scientists, and it gets the results that it gets.

2) Actions have to be based on science, but necessarily involve:
- science
- engineering
- economics
- politics

I.e., I think there is a clear role for economists.

3) However, they have to get it right, and so far, I am not convinced they are. I have a disquieting feeling that they aren't.

I can summarize as saying:

Over the next 100 years, the "discount rate" may well act *negative*, at least for some periods, whereas many economists assume it will stay positive, and then they argue about the right value. Some whack Stern for having a low discount rate, but I calim even Stern may be too high.

- Peak Oil, and then later Peak Gas
- increase in fertilizer prices [even before Peak Gas]
- stress on water systems, via drawdown of aquifers like the Ogallala
- ==> increase in food prices (see cover story in this Dec8-14 The Economist)

- ==> inevitable increase of relative prices of things that use energy in the real world, like cement, steel, moving water, building dikes, seawalls, i.e., things for which Moore's Law helps not a bit. In less than a 100 years, major construction efforts will *not* have petroleum to help them.

Put another way: people are "richer" because their iPhones are more powerful than a 1970s mainframe that cost a lot more, phone calls cost less, they get more services .... the GDP/person is higher, but, in 2100, if you have to replace New Orleans, you'll need concrete, steel, bulldozers...

Also, by 2100, the worldwide supply chains that only work with cheap petroleum will look different:

The most useful thing I've seen is:
Ayres & Warr:

Anyway, *IF* the relevant discount rate is actually negative, especially for after-the-fact mitigation efforts,

AND IF economists actually started to believe that

THEN I think they'd be screaming "Oh my goodness, do something about AGW yesterday!"

Here's a thought experiment:
consider the 1950-1997 Netherlands Delta Works:

If the discount rate is positive, the Dutch could do an equivalent project in 2050-2097 at a *lower* fraction of their income than they spent to do the original. How they will do this when food will be more expensive, transport more expensive, and with no petroleum, is not obvious.... negative discount rate, in effect, and it doesn't matter one bit how cheap electronics are, or how much travel has been displaced by email and videoconference.

Thomas Palm said...

Growth consists of two parts: greater use of resources and smarter use of resources. While the former seems to be hitting a ceiling the latter has a long way to go. As long as we can come up with new inventions making better use of those limited resources we can have economic growth.

Belette said...

I'm with John. Economics is (in theory) about optimising your choices. Science (in the case of GW) is about finding out what the costs and benefits might be. The capitalist political/economic system does seem to be built on the assumption of positive growth, but I don't think economic theory is.

There seems to be a strand of responses to GW that says something like "well maybe economists say this, but I don't like what that implies, so I'll diss the economists". This is no more respectable that the septics who say "well maybe the scientists say this, but I don't like what that implies, so...".

Meanwhile, are you sure that negative growth implies a negative discount rate? If the economy were collapsing, I'd still prefer a dollar today overa dollar tomorrow.

ks said...

I can think of one thing that undergoes infinite growth in a finite space that could serve as a useful analogy -

a malignant tumor.

Michael Tobis said...

Belette, it is my opinion that the intellectual health of a discipline is a legitimate question for those outside that field to inquire about before taking the declared expertise at face value. Indeed it's a crucial question.

In my opinion the intellectual rigor of climatology as a whole is spotty, though I am certainly aware of brilliant and serious minds within the field. I think the IPCC process is nevertheless valid and valuable, and that the main things we conclude are probably right, but

I also think we could do vastly better if we were less territorial, less terrified about where our next grant were coming from, and more serious about interdisciplinary collaborations.

My impression of economics is that it is very weak, and full of empty bluster. I am willing to be convinced otherwise. I admit my knowledge is superficial. Some of the claims frequently made, though, strike me the same way homeopathic claims do. That is, they are so totally remote from plausible that any attempt to pay attention to what passes for their reasoning makes my head hurt.

Specifically, its claims to be about decision making rather than specifically about money are among the weakest parts of the arsenal of ideas that economists have.

I am willing to be convinced otherwise, and I heartily recommend further challenges to all fields from the outside and further attention to defending them. I think this is a good thing, not a bad one, to the extent that the challenges are genuinely openminded.

You correctly point to the parallels. I can't reasonably insist on argument from authority of "climatologists" without granting the same to "economists". Nevertheless, I have real fundamnetal doubts about economics.

Of course it disturbs me how many people treat economics as an authority while denying the authority of other fields.

The quoted argument is less obnoxious, but more dangerous. It is that the science is fine, but that economics must be the final arbiter of costs and benefits. Well, maybe, but then they need to prove to us that they've got it right. I really doubt it.

Michael Tobis said...

Thomas, yes your point is well taken.

There are senses of "growth" which can continue indefinitely. Perhaps there is some meaningful way to measure something like that and optimize for it. We don't seem to have that now.

However, it is also beside the point, especially in North America and in countries intent on following our path, (Helas, France!) and ultimately for the world.

What we need to do is optimize for sustainability first. Our obsession with growth almost perfectly pessimizes rather than optimizes the likelihood of a comfortable planet in the future.

The marketplace is cleverly constituted to solve problems we no longer have and consequently exacerbates problems we never envisioned when we developed it.

Michael Tobis said...

ks, malignancy, yes, is an obvious analogy. I often say the word "growth" as if I were referring to a tumor. That conveys an aspect of our circumstance that is widely ignored.

Yet no prominent politician, left, right nor center, dares confront this dogma that growth is the goal of governance.

It's time to find the brakes on this thing!

John Mashey said...

re: discount rates
This is mostly as I interpret the Stern Report:\

On page 32 (page 10 of the PDF), or page 36 of the printed version, if you have that handy, is BOX 2.2 DISCOUNTING, and it includes comments on negative discount rates.

I'm still studying that, but it seems consistent with:

and various other economics sources I've looked at. I've got Keohane & Olmstead "Markets and The Environment", haven't read it yet, but the discounting discussions look fairly similar.

Take a look at BOX 2.2 and see if you think I'm interpreting it correctly.

I'm very early in trying to understand this; from what I've seen, Robert Ayres' ideas make sense to me, but then, he originally trained as a physicist :-)

He co-authored a good article in that Sovacool/Brown book I recommended.

As for a dollar now versus a dollar tomorrow: well that's usually true, unless there is serious deflation going on. But let me try another thought experiment.

Suppose I have $X now.
a) We could spend it on building dikes that we think would cover us for 100 years.

b) We could invest the money in stocks/bonds, figuring I can then spend it to build the dikes later on.

c) We could spend it on something else, figuring that we'll be richer in 2050, and 2100, and so the proportional cost of building dikes will be lower anyway.

I make no claim to know which of these is optimal, and of course, in CA this particular question is *not* theoretical.

My disquiet comes from the fact that:
- Stern observes that there are in effect different discount rates for different goods and services.
- a lot of after-the-fact mitigation/adaptation for AGW (as opposed to lessening it) seems *very* energy-intensive, physical-world stuff that doesn't get helped by Moore's Law.

One other thought example:
When one does a payback analysis for a PV-solar system for one's roof, if one expected that:
a) Grid electricity was going to get more expensive (likely)
b) PV-solar was going to get less expensive (likely) and more flexible (likely)

Then, on an economic basis, you could argue to delay doing the PV. [We have, although primarily due to big trees on neighbor's properties that kill serial-wired PV.]

BUT, if you believed
c) PV-solar was going to get more expensive later

THEN you would be tempted to rush out and buy ASAP, especially if you weren't really sure your income would be increasing faster than the cost rises, lest you discover that at some point, you are struck, and can never afford to do it.

ANYWAY, the bottom line of all this is that the economists as a whole have not yet convinced me that they have a solid handle on the possibility of negative discount rates for the goods most needed to adapt to the effects of AGW.

tidal said...

I responded a couple of times to your Grist post, and I had actually engaged Jerry Taylor himself at Desmog.

What I wanted to bring up here again is the work of Herman Daly, Georgescu-Roegen, Ayres & Warr (which I see John Mashey has referenced above), Robert Costanza, and others, has already gone a long way towards an alternative model where human economic activity is explicitly a subset of a finite world and subject to basic laws of physics and chemistry. (Unfortunately, they draw heavily on the second law of thermodynamics... I say unfortunately because, although all known physical processes obey this law and thus there is some rather compelling reasons to think it might apply to the physical transformational processes inherent in human economic activity as well, you have dismissed its application to economics as "pseudo-science"... I think that is quite unfortunate, because I think you are perhaps closing your exploration to a key insight that you are looking for in developing a "new model"...)

In a related pointer, Eli Rabbett is blogging on discount rates, Stern, Weitzmann and classical economics here: and here:
... Andrew Dessler stops by with a pointer to a paper on social discount rates he recommends here:

tidal said...

Michael, I think you would enjoy this talk immensely.

Josh co-authored a text with Herman Daly as well.