"System change is now inevitable. Either because we do something about it, or because we will be hit by climate change. '...

"We need to develop economic models that are fit for purpose. The current economic frameworks, the ones that dominate our governments, these frameworks... the current economic frameworks, the neoclassical, the market frameworks, can deal with small changes. It can tell you the difference, if a sock company puts up the price of socks, what the demand for socks will be. It cannot tell you about the sorts of system level changes we are talking about here. We would not use an understanding of laminar flow in fluid dynamics to understand turbulent flow. So why is it we are using marginal economics, small incremental change economics, to understand system level changes?"

Thursday, February 7, 2008

A Prolonged Economic Relaxation

There's a nice discussion on Dot Earth about overconsumption called "The Endless Pursuit of Unnecessary Things", a phrase, astonishingly enough, attributable to Adam Smith.

My contribution to the thread is to raise the usual gripe about conventional economics. Here is what I wrote in its entirety:

I am thrilled by and grateful for this conversation.

The problem with the realization of the vicious circle of insecurity, overwork and overconsumption is that it butts directly against the dictates of classical economic theory and the contemporary politics that is so driven by it.

I have never met a person educated in a physical science who was comfortable with the idea of endless growth that appears to be dogmatic in most circles.

Indeed, conflated with our concern about energy, ecology and the environment these days is anxiety about “recession”. If we agree that we are striving too hard and consuming too much, a recession is something to welcome and celebrate (though of course it must be managed well).

We need to rethink all of the concepts of economics, which manage well in an open system with ample resources and scarce labor, and lead simply to our bizarre and counterproductive behaviors today.

(I can’t resist pointing out the analogy to Easter Island, whose culture was plainly successful and adaptive until the very end, when it abruptly got out of scale with its environment and maladaptive. See Jared Diamond’s book Collapse for more on this point.)

Your quotation from Mr. Handy illustrates the point perfectly:

“The conundrum is this: All that stuff creates jobs — making it, promoting it, selling it. It’s literally the stuff of growth. What I’d love to ask Peter Drucker is: How do you grow an economy without the jobs and taxes that these unnecessary things produce?”

It is no conundrum, Mr. Handy. You just don’t, that’s all.

Though he seems to be awakening to the fact that there is a problem, Handy can’t bring himself to address the question of whether growth is by definition inconsistent with sustainability. As a person committed to thinking about the economy the assumption is so deeply held that it’s simply invisible to him!

Just as healthy children grow and healthy adults don’t, underdeveloped economies ought to grow and developed economies ought to, well, sustain. Is this such a radical concept? Is this an unreasonable rough cut at what “sustainability” means?

Many of us are bemoaning the disconnect between our circumstances and what politicians and the press (present company excepted) seem to be discussing; issues about energy, ecology and the environment, for example. There’s a fourth “E” word, though: economics. The issues we are discussing here simply don’t map on to conventional economic thought.

The efforts that do exist to break free of the growth imperative at the fringes of) economic theory, with a few notable exceptions (look for Charles Hall at SUNY Syracuse for a good example), have generally been muddleheaded and romantic.

If there were any possibility of real leadership from modern politics, we’d be seeing leaders trying to help us through the establishment of a new intellectual framework for describing and planning the nature of economic activity in the light of new objectives and new constraints.

What we hear instead is almost perfect silence on this matter.

Let me start with my own small contribution to this endeavor, one of nomenclature. In a mature and wealthy society, a period of declining economic activity should not be called a “recession”. I propose the alternative name “relaxation”. Let’s hope that the current relaxation is long and deep, and let’s try to be open as individuals and as a society to helping people who have to make difficult adjustments as a consequence.

In summary, I think the best thing we could all do right now in recognition of the long overdue economic retreat is to take a deep breath and relax.

Have a cup of tea. Listen to some music. Talk to some old friends. Try to find some time to think about something besides your own troubles. Enjoy the fact that we’re doing ever so slightly less damage this month than we were twelve months ago. Look for ways to relax even more.

Update: Don't miss "tidal"'s comment, and check out these people that (s)he refers to therein.

Update: See also Workers of the World, Relax!


tidal said...

This will be a bit of core dump, but I wanted to engage this discussion.

Even "mainstream" economics is struggling with it's evident shortcomings:
Robert Solow: Economic History and Economics
"modern economics has an ambition and style rather different from those I have been advocating. My impression is that the best and brightest in the profession proceed as if economics is the physics of society. There is a single universally valid model of the world. It only needs to be applied. You could drop a modern economist from a time machine-a helicopter, maybe, like the one that drops the money-at any time, in any place, along with his or her personal computer; he or she could set up in business without even bothering to ask what time and which place... We are socialized to the belief that there is one true model and that it can be discovered or imposed if only you will make the proper assumptions and impute validity to econometric results that are transparently lacking in power.... Of course there are holdouts against this routine, bless their hearts... Let me recapitulate. If the project of turning economics into a hard science could succeed, it would surely be worth doing. No doubt some of us should keep trying... There are, however, some reasons for pessimism about the project. Hard sciences dealing with complex systems-but possibly less complex than the U.S. economy-like the hydrogen atom or the optic nerve seem to succeed because they can isolate, they can experiment, and they can make repeated observations under controlled conditions. Other sciences, like astronomy, succeed because they can make long series of observations under natural but essentially stationary conditions, and because the forces being studied are not swamped by noise. Neither of these roads to success is open to economists. In that case, we need a different approach."

Or Joseph Stiglitz: There is no invisible hand "Adam Smith's invisible hand - the idea that free markets lead to efficiency as if guided by unseen forces - is invisible, at least in part, because it is not there.... That such models prevailed, especially in America's graduate schools, despite evidence to the contrary, bears testimony to a triumph of ideology over science. Unfortunately, students of these graduate programmes now act as policymakers in many countries, and are trying to implement programmes based on the ideas that have come to be called market fundamentalism... Good science recognises its limitations, but the prophets of rational expectations have usually shown no such modesty."

Two branches of the "holdouts", as Solow refers to them, would include "ecological economists" (Daly, Costanza, Ayres, Farley... I recommend Michael Common's text as good but comprehensive intro... Daly&Farley is good as well.). But I think one needs to also understand "environmental economics" - because that is the "standard" approach that "ecological economics" is trying to "replace"... although both the texts above discuss standard economics, their minds are made up, so normal caveats...

More radically, you have the Post-Autistic Economics folks.

Nevertheless, this stuff is so radical compared to today's social memes, etc., it's hard to imagine their broad adoption on the timescales required... Part three of Climate Code Red posits that until we start acknowledging the "problem" as an emergency rather than a challenge we are not likely to get much traction in changing our institutions/policies... Some of Ian Dunlop's quotes are particularly good: "we have created a political and capitalist system which has proved incapable of recognising that the most important factor for its own survival is the preservation of a global biosphere fit for human habitation. Our institutions are totally short-term focused; politically due to the electoral cycle and corporately due to perverse incentives. Thus we are uniquely ill-equipped to handle these major problems, which are all long-term.
Our ideological preoccupation with a market economy based on short-run profit maximisation is rapidly leading towards an uninhabitable planet. As inconvenient as it may be politically and corporately, conventional economic growth and rampant consumerism cannot continue. Markets are important, but they operate within rules. Henceforth, the rules must change to ensure long-run sustainability.
Nationalism and short-term vested interests have so far prevented the development of a global governance framework capable of handling this “Tragedy of the Commons”. However, the issue of global sustainability is now much bigger than any nation state. Global warming, in particular, is moving far faster than the scientists had predicted, to the point where we are already in the danger zone.
The stark fact is that we face a global sustainability emergency. But it is impossible to design realistic solutions unless we first understand and accept the size of the problem. We know those solutions; what is lacking is the political will, firstly to honestly articulate the problem and secondly to implement those solutions."

The first two sections of that report (which were previously published separately last year as "The Big Melt" and "Target Practice") make the case that we are already in emergency mode. And it discusses how reticent most of us are to adopt this position for fear of being seen as "alarmist" or "crazy" or "not practical"... I can certainly relate to those feelings... But the case they make for the status quo continuing unless we collectively frame this as an "emergency" is persuasive... Unfortunately, I have trouble imagining the "Pearl Harbour" that will trigger that mindset shift "in time"... if the Arctic melt in '07, or Katrina '05 aren't enough, what will be?

But on that point, much of the third part of "Code Red" uses military metaphors... one quote is from Admiral Stockdale, a "Hanoi Hilton" POW: "you must never confuse faith that you will prevail in the end - which you can never afford to lose - with the discipline to confront the most brutal facts of your current reality, whatever they might be"

Well, like I said, a core dump... But I really think that this is the next big issue... The "science" has done its part... Now it is up to society to implement policies to deal with the crisis... The question is whether we can do so within the current economic and institutional paradigms, or do we have to fix both issues at the same time? I certainly hope the existing paradigms are up to the challenge, because that would reduce the overall challenge... but I fear that they are not...

mz said...

One question is, who decides, when an economy is developed enough and who decides, what things are necessary and what not?

I myself view a certaing kind of growth (more about this below) and progress as one of the fundamental goals of life and humanity.

But the short term profit making is instead working against this. It is detrimental. The progress must take into account the limited resources. And not rely on the limited and uncertain scientific and technological progress to fix planning errors. Else it will be subject to drastic drops.

I view myself as a green person but at the same time I'm fascinated with space exploration and a million other things that are only possible with high technology and great resource use.

Humanity could have such a great future if it grew up and excercised some self restraint and patience. Only then can it continue beyond the limits of the planet.

Michael Tobis said...

mz, note I did say "as a first cut".

I am in favor of progress, indeed I think one of the saddest of the world's failures in my lifetime is in our losing sight of what "progress" once meant.

First we need to stop destroying what we already have in the name of an economic model that seems no longer even remotely suitable to our circumstances.

I think we're basically agreed.

Mark said...

You cite Easter Island as an example of out-of-scale development and ecological collapse. I've seen the suggestion that the Easter Island collapse was in fact driven from the outside, by slavers. Wikipedia...


doesn't really mention this but does suggest there is some controversy about the state of the island when Europeans first arrived.

Do you have any comment on this? Is Easter Island perhaps not a good example to use?

Michael Tobis said...

Mark, I think there are people trying to make the lesson less striking than it might appear. There are those who like to believe that white people have a monopoly on overconsumption as well as those who don't want to believe inthe concept of overconsuption at all.

I can't imagine slavers fitting in with what I've read. The society had greatly contracted and was totally isolated when discovered by Europeans in the 18th c.

There is some argument that the trees could not reseed because of the rats imported by the Polynesians as an important factor.

Again, I highly recommend Jared Diamond's book "Collapse" about this.

There is little doubt that there was a prosperous society that had a hand in its own abrupt and severe decline. Furthermore, a previously adaptive ideology had become maladaptive. Much will always remain mysterious about Easter Island but the core similarities to our circumstances are very hard to escape.

mail said...

I agree that the belief that continuous endless growth is desirability, necessary and forever possible is nuts and in the end dooms us and the planet. We have a situation where our economies are geared to always be growing and any period of negative growth (recession) is considered to be abnormal and disastrous. The economy will always fluctuate, so we need to find a way to structure it so that it can oscillate between phases of growth and recession, staying on an even, sustainable trajectory.

I wonder if a solution may be to engineer the economic system such that during recession phases, the public sector soaks up the un- and under-employed to undertake sustainability and community service related tasks.

For example: it is apparent everywhere you look, that nature, landscapes and natural resources are in decline. It would be possible to arrest that decline, but it would take orders of magnitude more effort and resources that are currently devoted to the task. When I look at the rate at which weeds are invading the bushland remnants and reserves here in Australia I despare. If we employed thousands of trained bushland managers and we could manage it. But we have only a fraction of that number. The problem is that such work does not make profit, and certainly no export profit, so in our ever more privatized economy only token effort is put toward it.

Would it not make sense to work out a way to enable the economy to shift dynamically between greater or lesser employment in sectors undertaking such activities - in response to growth/recession phases, thereby flattening out the impacts of the cycles.

Dano said...

Thank you Michael. I'd add to your excellent little essay and to mail's point that perfect Vonnegut quotation:

The good earth: we could have saved it but we were too damn cheap and lazy



Hank Roberts said...

While the economy 'produces money' much of it is illusory, and disappears -- the banks only have to put one dollar in their vault out of say ten you bring them to put into savings, they lend out the rest.

And they figure each of the dollars lent out increases over time.

Where does the projected future money go?

There are roughly as many millionaires in the USA as there are children in poverty.

"One Bush Left Behind
by Greg Palast
January 29, 2008

Here’s your question, class:

In his State of the Union, the President asked Congress for $300 million for poor kids in the inner city. As there are, officially, 15 million children in America living in poverty, how much is that per child? Correct! $20.

Here’s your second question. The President also demanded that Congress extend his tax cuts. The cost: $4.3 trillion over ten years. The big recipients are millionaires. And the number of millionaires happens, not coincidentally, to equal the number of poor kids, roughly 15 million of them. OK class: what is the cost of the tax cut per millionaire? That’s right, Richie, $287,000 apiece."

Imagine no child left in poverty.
Affordable. Easy. What's the point of an economy that sucks money from the shallow end and pumps it always to those who have the most already, and consumes the natural stocks of the planet far faster than they can be restored?

Picture it:


How much of that 'money' the rich have is illusory? Maybe 200 billion dollars. Some of it's a bubble in your retirement 401k account, too.


tidal said...

Just read these egregious quotes and thought I would post here, because, unfortunately it speaks volumes for how anithetical "the environment" is for certain branches of economic thought...

The quotes are from Jean-Baptiste Say, of "Say's Law" fame (colloquially "supply creates its own demand")... Say's writings had a major influence on the development of neoclassical economics, and directly influenced people like Thomas Sowell and Art Laffer...

Ok. Here is M. Say discussing natural resources: "Natural resources are inexhaustible, because if they weren't we wouldn't obtain them for free. Since they can be neither multiplied nor exhausted they are not the object of economic sciences." As preposterous as that is, one is tempted to think that Say was just having a bad day when he wrote that. Nope. He later comments: "We cannot consume natural resources; by breathing atmospheric air, we alter, in fact we destroy, its property to sustain life: but we do not consume any resource, because it had no value; because we could enjoy it without acquiring it for a price, without paying for it."

Omg, it is so backwards... Granted, he was writing in the early 19th century, but you can get some inkling of the long-standing "place" that the "the environment" has held in history neoclassical economic thought...

I still think that the policy prescriptions for GHG's, etc.(pigovian taxes, cap&trade, etc.) are the right tools, but I shudder when I think about all the other baggage that comes along with so much of the prevailing economic paradigms...

RM Reiss said...

I once read that Simon Kuznets, the economist who created the concept of GNP measurement for the U.S. in the 1930's, initially included the value of natural resources as an asset, but they were taken out of the equations when the government actually put his work to use.

On consumption, Veblen is still worth reading: