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

Monday, January 5, 2009

Economics as Begging the Question

I mean "begging the question" in the original sense, of constructing a complex but ultimately circular argument that depends on the result you intend to to prove, not the unfortunate sense that it inevitably developed in casual speech of "begging for, or raising another question".

I think great swaths of economics are based on question-begging. In pursuing the blogospheric take on Tierney vs. Holdren, I came across this amazing essay by Dave Roth on a blog called Geryon: Obama's science advisor and the theory of sustainability. (See also follow-up articles Response on Holdren and Tierney and The Holdren Pick on the same blog, the latter by co-author "Bosie".)

For a more defensible quote, consider this from the latter:
I did not intend to question the ability of Holdren to be a useful and competent science adviser. I know nothing about his views other than in the Erhlich-Simon wager, so perhaps it is unfair to judge him on the basis of this incident.

Note, however, that Holdren can continue to maintain something (that we can run out of natural resources like oil) that is provably wrong on economics but that this does not make people question his fitness as a science adviser, while Larry Summers statements on genetics and intelligence (which may be wrong but are not universally agreed to be wrong) disqualified him in the eyes of many from being an economics adviser. I find this double standard interesting.
Now this sounds reasonable at first blush. I don't propose to open the Summers can of worms here, but it is interesting that the claim is not just that "we are running out of oil" is taken as false nor even that the claim "we CAN run out of oil" is taken to be false, but that it is taken to be provably false ON ECONOMIC GROUNDS.

This is perfectly silly, isn't it? Whether there is or isn't an essentially infinite supply of a consumable resource is not a question that can be settled by economics, any more than the orbit of Jupiter can be settled by a plant taxonomist. If there is a result in economics (to the exclusion of geology) that shows that "it is impossible to run out of oil", that result is false, and must be based on false reasoning or false assumptions.

Now let's go back to the original article:
Now, of course, I might disagree with (to take just one example) the psychologist's conclusions about what we should do in response to the agreed-upon fact that x percentage of child abusers were abused themselves. That is to say that it is generally considered acceptable for me to disagree with an expert on the ultimate implications of basic facts and theories in the sciences (such as, e.g., the best policy for preventing child abuse), but it is not considered acceptable (i.e., worthy of an educated, intelligent person) to disagree with them on what the basic facts and theories are.

When a biologist explains the theory of evolution, provides evidence for the theory, and then shows that the whole framework of biology is based on this theory, only a deeply unscientific person would dispute it. We might still fairly dispute whether this theory means that there is no god (for example) -- so we could disagree on secondary matters -- but on the primary matter itself there is no real tolerance for disagreement (and there shouldn't be either).

And this rule holds for basically every hard and soft science I can think of except for one, and that one is economics. For some reason, it is considered completely acceptable for intelligent, educated people not only to disagree with economists on the secondary matters (i.e., the ultimate implications of economic theory and facts) but also on primary matters (i.e., on the facts and basic theory themselves).

People can, and do, routinely claim things like "trade makes everyone worse off," "the earth will run out of natural resources," "the rise of China and India will be bad for US standard of living," and "the global prosperity of today is not sustainable." All of these things are not only proven wrong by economic theory, but they are demonstrably wrong and can be shown to be demonstrably wrong with all sorts of empirical evidence. But for some reason, it's entirely legitimate to ignore or disbelieve the most basic tenets of economics in a way that is not permissible in any other field.
Well, I don't think that's true at all. Climatology, for one, is constantly questioned as we can attest around here easily enough. Evolutionary biology is constantly called into question by fundamentalists. Even branches of pure physics are sometimes questioned for being unfalsifiable and fanciful. The claim that it should be otherwise
("there is no real tolerance for disagreement (and there shouldn't be either)") is made without justification, and shows a real lack of understanding of human intellectual history. Disciplines really do go off the rails; disciplines really ought to be prepared to defend themselves.

If someone makes the claim that a theory of human resource allocation decisions is sufficient to prove the claim that physical reservoirs of a consumable resource are inexhaustible, they are making a remarkably extravagant, to my ears bizarre claim. I don't believe them that this is "proven" by economics, and what is more, if it turns out that most economists believe such a thing, it reflects very badly on the credibility of the field as a whole.

The whole Tierney/Holdren thing is great in that it brings the question of the relative credibility of economics vs climatology into focus. I think it's a very good idea to keep this question in people's minds.

Roth's position is easy and at first blush consistent: "trust all experts". However, I will have no difficulty finding experts on oil recovery who believe that we are closing in on depletion of practically recoverable oil. This contradicts Roth's claimed economics-based expertise, and thus resolves nothing. We have to determine whose "expertise" actually corresponds to reality.

Interestingly, one can make an economist-style argument by noting that oil companies hire many more seismologists and geologists than they do economists...

 

14 comments:

Penguindreams said...

The economist you're quoting seems to be taking a (common to economists) selective definition of 'run out'.

Us non-economists think that if the price of something gets too high for us peons to use it, limiting use to only some tiny subset of the population for time tiny subset of purposes, that we've 'run out' of the item. Economists like him simply take that the price heading towards infinity has nothing to do with 'running out' -- only every single molecule of oil being extracted would be to 'run out'.

By that peculiar definition, he's right -- we won't 'run out' of oil. It will 'just' get too expensive for (almost any of) us to use.

gravityloss said...

Ah, but there's the language barrier.

The economist-minded argument is that you can't run out of oil *literally* because there's always some little drop left in a crack somewhere that would be too expensive to extract.
And actually long before that, it gets too expensive.

So the oil is left on the ground.
That's probably hovering near the point of positive energy return. Ie if it takes more energy to dig up the oil than it contains, there isn't a case to dig it up. (Though, it is a extremely good energy carrier so it will probably still be dug up somewhat past that point.)

I think that's what the economists mean.

It's quite a trivial point of course.

So, a different statement is needed for the debate subject than the too simplistic "we can run out of oil".
But they are no longer simple: "oil will get too scarce to extract with a positive energy cain / to extract economically" etc etc.

Michael Tobis said...

Well, that's helpful. Of course it's small comfort but it makes a little more sense. A bit of a straw man; nobody is suggesting that the last pint of petroleum will ever be extracted.

Even in this shallow interpretation, the principle is not entirely convincing.

We certainly can run out of fish, for instance, and a rise in prices as they become luxury goods will just make the end all the more spectacular.

Mark said...

We do seem to have run out of dodos.

tidal said...

Mark said...
We do seem to have run out of dodos.


Ah, yes, but therein Mark betrays his woeful misunderstanding of all things economic! We can substitute passenger pigeons!

Or, failing that - as per Julian Simon - we could alchemically make new dodos out of other elements! "The quantity of copper that will ever be available to us is not finite... given the problem of the economic definition of "copper," the possibility of creating copper or its economic equivalent from other materials, and thus the lack of boundaries to the sources from which copper might be drawn."

Nobel prizes in economics have been awarded to deep thinkers like Robert Solow who have "proven" that: "If it is very easy to substitute other factors for natural resources, then there is, in principle, no problem. The world can, in effect, get along without natural resources."

Here's how it all works. Suppose bluefish tuna are going extinct due to overfishing. Because they become scarce, their price rises. This signals the invisible hand to mysteriously cause the tuna to begin to reproduce and mature more rapidly (law of price and supply). The increased price also causes the hand to encourage fishermen to focus on cheap fish instead of expensive fish like tuna (law of price and demand). This is not theory. This is proven fact which inevitably follows from the patently obvious assumptions of perfect markets and "la mano invisible". You're welcome.

Dano said...

Tidal,

you forgot that we are going to have chickens with 9 legs and 17 wings, if only th' regalayshun would get out of the way of agribiness....er...brave patriots innovating in their garages!!!!

Best,

D

tidal said...

Like I was saying!
"Tuna fish made a rare foray into headlines Tuesday, when a prized bluefin fetched $104,000 at a Tokyo fish auction... the second-highest price ever...
“It was the best tuna of the day, but the price shot up because of the shortage of domestic bluefin,”...
The bluefin and bigeye stocks worldwide are those in the most immediate danger of collapse with some stocks threatened with extinction...


See? It's working! Except for the part about increased reproduction, accelerated maturation and reduced demand...

More seriously, regarding the (shared) ongoing frustration with mainstream economics w.r.t. the real world... I rather enjoyed this succinct but almost throw-away comment on "why economics is not a science" on a RealClimate thread last October: Christopher Hogan Says:
30 October 2008 at 10:43 AM

"Economics is a social science, and as such, you can be fairly precisely say why it is different from the physical sciences. First, there are no conservation laws in economics. Second, there are no true experiments, at least in macroeconomics. Third, there are no unchanging underlying relationships between economic quantities. Economic relationships evolve in (largely) unpredictable ways.

Given that — no conservation laws, no experiments, and a constantly moving target — the real wonder is that economists can sometimes say something useful, not that some political hack like Greenspan claims to have been shocked by the collapse of the credit bubble"


And there was an intriguing but ultimately frustrating discussion on Edge recently: CAN SCIENCE HELP SOLVE THE ECONOMIC CRISIS?

Anyway, it's not "economics" per se that is the problem w.r.t. resources and the environment. It's the particular strain of of economics that likes to abstract away from the real world that is the problem. Ayres, Warr, Hall, Smil, Speth, Daly, Farley... there are any number of environmental or ecological economists that "get it".

And I think it's worth repeating something I believe you have mentioned earlier, Michael. We don't have time for a rework of economics given the urgency on the energy and climate change files. So we have to make do. Longer-term, though, I kind of think it's inevitably going to be a Marshall McLuhan/"the medium is the message" kind of thing. Mainstream economics is going to have to adapt to the real world, aimply because it's models will increasingly fail to explain what is going on.

Michael Tobis said...

I'm not sure I said we don't have time for a rework of economics.

What I think, what I might have tried to say, is that we don't have time for a rework of capitalism. It's too ingrained into everything, so whether or not we like it is of no more consequence than whether or not a fish likes to be wet.

I think we desperately do need a new economic theory, because our problems are too complex to yield to intuitive decision-making. That theory, though, will have to involve individual and corporate economic actors.

Erik said...

Hi Michael,

It's been a while since your visit to my lovely Pasadena home and my last visit to your site!

I wanted to second "Tidal"'s comment. Mainstream aka orthodox aka Neoclassical economics really does assert that resources are perfectly substitutable. In other words, when the oil runs out it won't matter, because something else will have been created by the Invisible Hand of free market capitalism. (According to Saint Milton Friedman, government has never created a new technology). This economist belief is the basis of Julian Simon's whole cornucopian ideal.

So it isn't so much that the oil will never run out, it just won't matter so long as we preserve free market capitalism.

It's also the case that mainstream economics rules the physical environment an "externality" that's irrelevant to the economy, so if you accept that as a ground rule, the oil will again obviously never run out. Since physical limitations like the size and contents of the Earth aren't germane (they're externalities), then we can view oil as coming into our pipelines from an infinite source.

Isn't economics fun?

-Erik

Michael Tobis said...

Well, put that way, it definitely has the virtue of simplicity. And cheerfulness. No wonder global warming is a hoax; it would violate economic principles otherwise...

gravityloss said...

It can't be like that. I imagine externalities are stuff that is external to the problem at hand, not external in a sense that it doesn't have any meaning.

Say you can have an isolated system in thermodynamics or you can have a system that is in thermal equilibrium with the outside. Then you use different equations for expansion and compression of gas there.

Mind you, I haven't read any economics. :)

Do we have people who have read a lot of economics and are not in the "my invisible hand is mightier than your physics" mindset so a meaningful discussion would be possible?

Michael Tobis said...

GL, it is very much my impression that all branches of economics, not just the Friedmanites, don't seem to understand that systems have different applicable approximations under different circumstances or constraints.

My guess is that's why economics sometimes seems to work and sometimes doesn't.

They don't seem to have a clue about system regimes, (e.g., turbulent vs laminar flow) dimensionless constants, (the above is governed by Reynolds number) etc.

What they have come up with is so mathematically bizarre and pathological that it offers no insights as to what alternative regimes might look like.

Nevertheless, people will have some collective behavior as long as there are a lot of people. We may need a clean slate altogether but we need something that serves the intended purposes of macroeconomics.

John Mashey said...

For econ that makes more sense (to me, anyway):
try Robert Ayres and Benjamin Warr.

Of course, Bob was trained as a physicist, and so believes in what I'd call "conservation of reality."

Start with the last page of Ayres ASPO 2005, which shows US GDP under different efficiency assumptions plus Peak Oil, then go back and read the paper.

I've reviewed a copy of Ayres& Warr book coming in April. Get your library to order one.

I know this is strange, but these folks actually think energy and resources matter to economy...

Marion Delgado said...

I hate to admit it, but when it comes to Tierney, while I am never guilty of petitio principii, I usually resort to ad hominem. In its original sense of being the counterpart to ad authoritem.

"Well, it's Tierney!"

In my defense, whenever someone drags him in, I think what's really being communicated first is that "Tierney is someone whose statements we should consider in a serious discussion of any public policy question even though he's basically a Perl script." And that's proposition 0.