"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?"

Wednesday, January 28, 2009

Economists Trying to Control the Discourse

You would think the situation might call for a revisiting of conventional notions, a moment of introspection, an admission that perhaps past advice may have been not entirely of the finest caliber.

You might think so but, well, no.

David Leonhardt, in an unusually early preview of this week's New York Times Magazine:

But while Washington has been preoccupied with stimulus and bailouts, another, equally important issue has received far less attention — and the resolution of it is far more uncertain. What will happen once the paddles have been applied and the economy’s heart starts beating again? How should the new American economy be remade? Above all, how fast will it grow?

That last question may sound abstract, even technical, compared with the current crisis. Yet the consequences of a country’s growth rate are not abstract at all. Slow growth makes almost all problems worse. Fast growth helps solve them. As Paul Romer, an economist at Stanford University, has said, the choices that determine a country’s growth rate “dwarf all other economic-policy concerns.”
(Note, the links pasted through from the Times, which continues to have a completely idiotic policy to automatically link irrelevant articles, but that's a minor gripe compared to this one. Normally I just excise them but I'm too peeved at the moment to bother.)

I admit I haven't screwed up the courage to read beyond that point as yet. I'm sorry but it appears that I am too feebleminded to be able to understand the point on which the whole lengthy article expands.

Will someone, please, very slowly and patiently, explain to me what it is that is should be growing forever, how it is possible that it can do that (when all other growth processes in nature eventually terminate), and why we need it to do that? Please also explain why that should dwarf all other "economic-policy" concerns, like, say, sustaining a viable planet. I and the other seven billion of us would be most appreciative. Thanks in advance.

Update: Reading on:
For centuries, people have worried that economic growth had limits — that the only way for one group to prosper was at the expense of another. The pessimists, from Malthus and the Luddites and on, have been proved wrong again and again. Growth is not finite.
Which raises another request for assistance. Can someone provide such a "proof", please? Perhaps that word means something different to an economist.

The rest of the article is not too offensive though it seems a bit oblivious to, well, a lot of things. To be fair I did like this bit though:
He then told a story that John F. Kennedy liked to tell, about an early-20th-century French marshal named Hubert Lyautey. “The guy says to his gardener, ‘Could you plant a tree?’ ” Summers said. “The gardener says, ‘Come on, it’s going to take 50 years before you see anything out of that tree.’ The guy says, ‘It’s going to take 50 years? Really? Then plant it this morning.’ ”


tidal said...

Last Wednesday night, I attended a lecture by Peter Victor, who is an economist and professor in (and formerly Dean of) the Environmental Studies program at York University (Toronto). (And, as it turns out, a neighbour.)

In late 2008, Peter published "Managing Without Growth: Slower by Design, Not Disaster".

The slide deck (and maybe an earlier presentation of the materials? doesn't work for me...) appears to be here. His website is here. A google book preview is here.

A lot/most of the book/presentation goes - again - to making the case about why "growth" is simply not physically sustainable. It's useful to see - again - but I didn't need to be persuaded. (There was this interesting study referenced that I was not aware of: looking at 77 of the first 92 elements of the periodic table for which we have good data, human activities likely dominate the global cycles of 54/77.)

The two areas where his work seemed to have the most "new" insights were:
1. Extensive analysis and examples of how any sustained material growth basically erodes and eventually eliminates any net gains from efficiency. A key example was looking at past and forecast improvements gains in CO2emissions/$GDP in Canada, and how growth in GDP overwhelms our ability to meet overall reduction targets.
2. Actually providing economic models of what a no-growth economy might look like - if it even is "possible" under classic economic modelling. "The economy" he looked at was just Canada (he is working with others on the UK now), and does get it to "work" under certain conditions. The actual models are downloadable here.

What surprised me was his contention that this is somewhat pioneering work. He indicated that while various of the ecological economists - Daly, et al - had questioned the feasibility and desirability of "permanent growth", they had not/have not actually developed models of how that would function in world that would still have all the classic economic elements - supply (capital, labour, etc.) and demand (govt, imports, exports, consumption, investment).

But even though his "model" can "work" with various macro assumption sets, he still had little to say about how institutions would adapt to no-growth - capital markets, industry, religions, educational institutes, etc.

For instance, I asked him a question about the implications for capital markets in a no-growth scenario. He basically said those sorts of issues are topics for further study.

That, to me, is somewhat disturbing. That we are at this point and we don't have working "models" for no-growth economies? I've got no reason to doubt him, but this seems like a rather gaping/scary deficiency if it is the case. And goes a long way to explaining why "growth" is venerated.

For instance, my specific question about capital markets went as follows: There is strong case to be made that the risk-free rate of return - over longer periods - will equal the rate of economic growth.. But that implies that in a low/no-growth world, that the risk-free rate would be close to zero (sounds kinda familiar right now...). Likewise, the theoretical expected long-term return from stocks is simply the sum of the current dividend + growth. (The Gordon Equation). Well, if you plug "zero growth" into these equations, you get an aggregate opportunity set for investors of something like 0-1% for risk-free assets, and ~ 3-4% for equities (at current prices! i.e. after the financial crisis).

So, how would pension plans, insurance companies, endowments, individuals adjust to this? How do money managers/advisors?

And that's just capital markets. What does "the firm" look like if there is no growth? These government deficits we are taking on?

No idea. But this is tremendously scary. The entire system is built around assumptions that this would not/could not be the case. Again, I suspect it's a large part of the reason for Leonhardt et al's intransigence - the "other" reality is just "unthinkable".

Likewise, almost all of our policies developing the third world are all built around economic growth (Even Victor was explicit about this and basically concludes we "have" to let them grow....).

Anyway, we are facing jams no matter which way we turn... The deafult/Obama/global plan is definitely based on a "get her growing again!" set of assumptions... Wasn't really a point to this... just noodling some ideas that are bothering me... usually with some R.E.M. lyrics troublesomely looping through my brain:
"Consider this
Consider this
The hint of the century
Consider this
The slip that brought me
To my knees failed
What if all these fantasies
Come flailing around
Now I've said too much...

That's me in the corner
That's me in the spotlight, I'm
Losing my religion
Trying to keep up a point of view
And I don't know if I can do it
Oh no, I've said too much
I haven't said enough...

But that was just a dream
Try, cry, why try?
That was just a dream
Just a dream, just a dream

Michael Tobis said...

A wonderful contribution, and a good response on the "why" part. Many thanks!

Aaron said...

Long term to an economist is 31 years.

Economists only deal with western, capitalistic societies where objects of various kinds have more value than prudence, justice, patience, fortitude, faith, hope or charity. Economists assume that the value of art is what it sells for, and thus a free performance of music in the park has no value.

Thus, economics in the NYT has the value that the NYT can get for your eyeballs on its ads – about 2 cents. Take it for what it is worth.

Anonymous said...

Malthus and the Luddites and on, have been proved wrong again and again. Growth is not finite.

Economists must be jealous of the scientific reputation of us Homeopaths. I think they're lifting our ideas.

The minds in economics say that one can take a finite set of physical things (resources), and divide them up further and further to exhaustion, and all the while claiming that this forever increases their intrinsic value (power to do work).

Economics clearly shares its most sacred principles with those of Homeopathy. In Homeopathy we take a finite thing: an ounce of medicine. We divide it further and further. And we claim that each reduction not only maintains, but increases whatever capacity to do work were claimed of the original. And quantum mechanics bears our theory out.

And economists' sacred laws are proved by example of a contrary claim being, in an instance, false! Like our Homeopathy, again! Some foolish person I know thinks homeopathy doesn't work. But there are many cases of people taking homeopathic medicine getting better! This must prove, now by the laws of the science of economics no less, that the theory of homeopathy not working is always false. Proved false in many more instances than twice.

Dano said...

Perhaps we should ensure economists take some different math, such as geometry; also, they should take coursework in, say, 'history of human action'/'Environmental History'. Spheres of finite dimension do not contain infinite quantities of anything, including human ideas, which have never, ever, ever, ever, ever, ever, ever, ever avoided environmental degradation/catastrophe*.




* catastrophe being not resilient enough to withstand change, see, e.g. Mesopotamia, Maya civilizations.

David B. Benson said...

And then there still is Maertin Weitzman:

Harvard economist: Climate cost-benefit analyses are “unusually misleading,” warns colleagues “we may be deluding ourselves and others”